By SETH LIPSKY An under-reported development of this campaign season is the Republican Party's decision this week to send Gov. Mitt Romney into the presidential race on a platform effectively calling for a new gold commission. The realization that America's system of fiat money is part of its economic problem is moving from the fringes of political discussion to the center.

This is a sharp contrast from the last time a gold commission was convened, in 1981, a decade after President Nixon abandoned the Bretton Woods system and opened the era of a fiat dollar. The 1981 commission recommended against restoring a gold basis to the dollar. But two members—Congressman Ron Paul and businessman-scholar Lewis Lehrman—dissented and outlined the case for gold.

The new platform doesn't use the word "gold," describing the 1981 United States Gold Commission as looking at a "metallic basis" for the dollar. But the metal was gold, and the new platform calls for a similar commission to investigate ways "to set a fixed value for the dollar."

What has stayed with me from 1981—I covered the commission as a young editorial writer for this newspaper—is how momentum for a new gold standard faded amid the successes of the supply-side revolution. President Reagan pushed through his tax reductions and Federal Reserve Chairman Paul Volcker maintained tight money. Inflation was defeated. The value of the dollar, which had sunk below 1/800th of an ounce of gold during President Carter's last year in office, soared.

The 1981 commission was also stacked against a gold-backed dollar from the start. The ruling philosophy was monetarism—which, as propounded by Milton Friedman, seeks to keep prices steady by adjusting the money supply. The commission's executive director was Anna Schwartz, co-author of Friedman's "Monetary History of the United States," and the Democratic-controlled House held firm to monetarist orthodoxy.

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CloseGetty Images .Today things have changed. Both Friedman and Schwartz died as heroes of capitalism and freedom, but monetarism lacks the sway it once had. Even Friedman before he died seemed to adjust his thinking on using the quantity of money as a target. Schwartz predicted that monetary instability would be a breeding ground for a restoration for the role of gold.

In the ferment within today's Republican Party, the gold standard has become almost the centrist position. On the left would be those who favor a system of discretionary activism in which brilliant technocrats, such as Ben Bernanke at the Fed, use their judgment in setting interest rates. A bit to their right would be advocates of a rule, such as John Taylor's rule linking interest rates to various conditions, or one that requires the Fed to target the price of gold but stops short of defining the dollar in terms of specie.

In the center would be advocates of a classical gold standard, in which a dollar is defined as a fixed amount of gold. These include, among others, Mr. Lehrman, James Grant of Grant's Interest Rate Observer, publisher Steve Forbes, economist Judy Shelton, and Sean Fieler of the American Principles Project.

A bit further to the right would be partisans of the Austrian school of economics, including Rep. Paul. He advocates less for a gold standard than for an idea of Friedrich Hayek, the Nobel laureate who came to favor what he called the denationalization of money and a system centered on private coinage and currency that would compete with government-issued money. Further right are purists such as the radical constitutionalist Edwin Vieira Jr., who would simply price things in weights of gold or silver.

A good bit of overlap exists among the camps, but Congress has come alive to all points on this spectrum. Rep. Kevin Brady, a Texas Republican who is vice chairman of the Joint Economic Committee, is seeking to pass the Sound Dollar Act, which would end the Fed's mandate to keep unemployment down, instead having the central bank focus only on stable prices. Rep. Paul is pressing the Free Competition in Currency Act, which would end legal tender and put Hayek's ideas into practice.

In the Senate, Jim DeMint, Mike Lee and Rand Paul are offering the Sound Money Promotion Act, which would remove the tax on the appreciation in the value of gold and silver coins that have been declared legal tender by the federal or a state government. Utah has already made gold and silver coins legal tender in the state.

Then there is Mr. Romney. In Paul Ryan he chose a running mate who understands the idea of sound money. In June 2010, as chairman of the House Budget Committee, Mr. Ryan asked Mr. Bernanke what he made of record-high prices of gold. (The value of the dollar had just slid to below 1/1,200th of an ounce of gold; it has since plunged to below 1/1,600th of an ounce.)

"I don't fully understand the movements in the gold price," Mr. Bernanke replied. He confessed his belief that some people were hedging "against the fact that they view many other investments as being risky and hard to predict at this point." No wonder the eventual House bill to audit the Fed passed with overwhelming bipartisan support.

This is the context in which Mr. Romney last week moved so pointedly to distance himself from a suggestion by one of his advisers, Glenn Hubbard, that Mr. Bernanke should be considered for another term. Mr. Romney made clear that he would be looking for a new Fed chairman, an important signal from a candidate who has made some mistakes—such as suggesting that monetary policy should be kept away from Congress. In fact, it is precisely to Congress that the Constitution (in Article 1, Section grants the power to coin money and regulate the value thereof.

The New York Sun, the online paper I edit, has warned that a gold commission could prove to be the graveyard for sound money—on the principle that if one wants to bury an idea, one need but name a commission. But it's possible that a well-conceived and well-staffed gold commission could actually sort out the debate.

It's no small thing that Mr. Romney's platform calls for a gold commission and an audit of the Fed. The last Republican to run on a platform calling for a dollar "on a fully convertible gold basis" was Dwight Eisenhower, who cast the promise aside once in office. That's a strategic misstep for Mr. Romney, should he win in November, to avoid.

Mr. Lipsky is editor of the New York Sun. The recipient in April of a grant in the form of a lifetime achievement award from the Lehrman Institute, he is writing a book on the constitutional dollar, forthcoming from Basic Books.

More Fed Bond Buying Won't Let 'Animal Spirits' Out of the Cage If past is prologue, QE3 would act as a sugar rush to financial markets while spurring little if any growth..By GERALD P. O'DRISCOLL JR.

Markets will be hanging on every word in Federal Reserve Chairman Ben Bernanke's speech Friday morning in Jackson Hole, Wyo. That is because the minutes from the July 31-Aug. 1 meeting of the Federal Open Market Committee, released on Aug. 22, were widely interpreted as signaling some kind of further easing of monetary policy.

The minutes stated in part that "many members judged that additional monetary accommodation would likely be warranted fairly soon unless incoming information pointed to a substantial and sustainable strengthening in the pace of the economic recovery." And yet, one day after the minutes were released, St. Louis Fed President James Bullard said they were "a bit stale." This turned market sentiment around, sending equity prices down.

So will he send a signal favorable to "additional monetary accommodation"? Or will he endorse Mr. Bullard's comments?

Looking ahead to its next meeting on Sept. 12 and 13, the FOMC could decide to initiate a new round of "quantitative easing" through purchases of Treasury bonds, mortgage-backed securities or other unconventional asset classes, which has been its strategy since the fall of 2008. It might also choose to extend beyond the end of 2014 the period in which it anticipates holding the federal-funds rate near zero. These aren't mutually exclusive possibilities.

But whatever path Mr. Bernanke points the FOMC toward, further "monetary accommodation" of the type being discussed will be futile at best or counterproductive at worst.

Consider the kind of policies implemented by the Fed since the crisis began. One variety consisted of credit allocation, whether by direct lending to targeted financial institutions or even nonfinancial firms such as auto makers. Fed purchases of mortgage-backed securities direct credit to favored firms and sectors rather than to the businesses that could make most productive use of it.

Subsidizing housing finance is especially problematic, as homebuilding clearly overexpanded in the early 2000s and needed to contract. If public policy subsidized a good into excess supply, further subsidies aren't the cure. The Fed has merely delayed adjustment in the housing and financial sectors by continuing to direct credit to them.

The Fed has also engaged in temporary infusions of money into the economy via two previous rounds of quantitative easing, QE1 and QE2. It did so after driving short-term interest rates to near zero, which limited the effectiveness of traditional purchases of short-term government debt.

Quantitative easing is the Fed's version of "stimulus," the complement to fiscal stimulus. The trouble with all forms of temporary spending is that they have no permanent effects. They delay needed adjustments in the economy.

Today's state and local governments are a case in point. Municipal and state spending was propped up by federal transfers of many billions of dollars in the president's 2009 stimulus package. But as this federal money has dried up, public payrolls are declining, ironically enough for this administration, close to the presidential election. President Obama received bad advice when he was told that government spending would prime the pump of the economy. Instead it had the effect of temporarily transferring resources from the productive private sector to a bloated public sector.

The Fed's version of temporary stimulus will likely involve purchasing government bonds. If past is prologue, this will act as a sugar rush to financial markets. There will be equity- and bond-market rallies. Wall Street will rejoice, but none of this will translate into "substantial and sustainable" economic growth, the FOMC's stated goal.

Bond purchases won't change any fundamental determinant of economic activity. And in the current economic climate, a crucial issue is that investors don't know what the tax code will be next year. Investments are made in anticipation of after-tax profits. If the tax rate is unknown, investment returns are unknown. That is a great deterrent to capital formation and job growth.

This is no secret: The FOMC minutes from its July 31-Aug. 1 meeting refer to fiscal and regulatory uncertainties as a reason for the Fed to take action. The minutes reported that some participants thought a new bond-buying program "might boost business and consumer confidence." It hasn't done so in this recession. No amount of quantitative easing at this point will stir what John Maynard Keynes called the "animal spirits"—"a spontaneous urge to action rather than inaction"—needed for growth.

What would stir the spirits of investors and employers would be some policy certainty, reining-in of out-of-control government spending, stopping ill-advised regulations, and clearing the air of antibusiness rhetoric. No repeat of a one-off round of bond buying by the Fed substitutes for the fundamental and permanent changes needed.

Mr. O'Driscoll is a senior fellow at the Cato Institute. He was formerly vice president at the Federal Reserve Bank of Dallas and later vice president at Citigroup.

Rep. Ron Paul (R-Tex.) wins (again) the most significant victory of his congressional career. He has taken his pet issue since the 1970s–the unwarranted power and secrecy of the Federal Reserve–from something pretty much no one but him cared about six years ago, through a bestselling book and mass movement by 2009, the second time he’s gotten the House of Representatives to vote to widen the government’s powers to audit the Fed’s activities.

Huffington Post with details about the vote , and on Paul’s Democratic ally equally upset with the Fed’s lack of transparency, Rep. Dennis Kucinich (D-Ohio):

In a rare moment of bipartisanship, the House overwhelmingly passed a bill by Rep. Ron Paul (R-Texas) to audit the Federal Reserve.

The first ever GAO (Government Accountability Office) audit of the Federal Reserve was carried out in the past few months due to the Ron Paul, Alan Grayson Amendment to the Dodd-Frank bill, which passed last year. Jim DeMint, a Republican Senator, and Bernie Sanders, an independent Senator, led the charge for a Federal Reserve audit in the Senate, but watered down the original language of the house bill(HR1207), so that a complete audit would not be carried out.

$16,000,000,000,000.00 had been secretly given out to US banks and corporations and foreign banks everywhere from France to Scotland. From the period between December 2007 and June 2010, the Federal Reserve had secretly bailed out many of the world’s banks, corporations, and governments. The Federal Reserve likes to refer to these secret bailouts as an all-inclusive loan program, but virtually none of the money has been returned and it was loaned out at 0% interest. Why the Federal Reserve had never been public about this or even informed the United States Congress about the $16 trillion dollar bailout is obvious – the American public would have been outraged to find out that the Federal Reserve bailed out foreign banks while Americans were struggling to find jobs.

To place $16 trillion into perspective, remember that GDP of the United States is only $14.12 trillion. The entire national debt of the United States government spanning its 200+ year history is “only” $14.5 trillion. The budget that is being debated so heavily in Congress and the Senate is “only” $3.5 trillion. Take all of the outrage and debate over the $1.5 trillion deficit into consideration, and swallow this Red pill: There was no debate about whether $16,000,000,000,000 would be given to failing banks and failing corporations around the world.

In late 2008, the TARP Bailout bill was passed and loans of $800 billion were given to failing banks and companies. That was a blatant lie considering the fact that Goldman Sachs alone received 814 billion dollars. As is turns out, the Federal Reserve donated $2.5 trillion to Citigroup, while Morgan Stanley received $2.04 trillion. The Royal Bank of Scotland and Deutsche Bank, a German bank, split about a trillion and numerous other banks received hefty chunks of the $16 trillion.

“This is a clear case of socialism for the rich and rugged, you’re-on-your-own individualism for everyone else.”- Bernie Sanders (I-VT)

When you have conservative Republican stalwarts like Jim DeMint(R-SC) and Ron Paul(R-TX) as well as self identified Democratic socialists like Bernie Sanders all fighting against the Federal Reserve, you know that it is no longer an issue of Right versus Left. When you have every single member of the Republican Party in Congress and progressive Congressmen like Dennis Kucinich sponsoring a bill to audit the Federal Reserve, you realize that the Federal Reserve is an entity onto itself, which has no oversight and no accountability.

Americans should be swelled with anger and outrage at the abysmal state of affairs when an unelected group of bankers can create money out of thin air and give it out to megabanks and supercorporations like Halloween candy. If the Federal Reserve and the bankers who control it believe that they can continue to devalue the savings of Americans and continue to destroy the US economy, they will have to face the realization that their trillion dollar printing presses will eventually plunder the world economy.

The list of institutions that received the most money from the Federal Reserve can be found on page 131of the GAO Audit and are as follows..

Federal Reserve Chairman Ben S. Bernanke participated in a live webcast of a town hall meeting with educators on Thursday, September 30, 2010 from 2:30-3:30 p.m. EDT. During this session, Chairman Bernanke answered teachers’ questions about the Federal Reserve and the economy.

Arends: Russia and other emerging-market nations are bulking up their gold reserves. Does that make bullion a good buy? .

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By BRETT ARENDS

I can't imagine it means anything cheerful that Vladimir Putin, the Russian czar, is stockpiling gold as fast as he can get his hands on it.

According to the World Gold Council, Russia has more than doubled its gold reserves in the past five years. Putin has taken advantage of the financial crisis to build the world's fifth-biggest gold pile in a handful of years, and is buying about half a billion dollars' worth every month.

It emerged last month that financial gurus George Soros and John Paulson had also increased their bullion exposure, but it's Putin that's really caught my eye.

No one else in the world plays global power politics as ruthlessly as Russia's chilling strongman, the man who effectively stole a Super Bowl ring from Bob Kraft, the owner of the New England Patriots, when they met in Russia some years ago.

Putin's moves may matter to your finances, because there are two ways to look at gold.

On the one hand, it's an investment that by most modern standards seems to make no sense. It generates no cash flow and serves no practical purpose. Warren Buffett has pointed out that we dig it out of one hole in the ground only to stick it in another, and anyone watching this from Mars would be very confused.

You can forget claims that it's "real" money. There's no such thing. Money is just an accounting device, a way of keeping track of how much each of us produces and consumes. Gold is a shiny and somewhat tacky looking metal that is malleable, durable and heavy. A recent research paper by Duke University's Campbell Harvey and co-author Claude Erb raised serious questions about most of the arguments in favor of gold as an investment.

But there's another way to look at gold: As the most liquid reserve in times of turmoil, or worse.

The big story of our era is not that the Spanish government is broke, nor is it that Paul Ryan apparently feels the need to embellish his running record. It's that the United States, which has dominated the world's economy for several lifetimes, is in relative decline.

As was first reported here in April of last year, according to International Monetary Fund calculations, the U.S. is on track to lose its status as the world's biggest economy -- when measured in real, purchasing-power terms -- to China by 2017.

We will soon be the first people in two hundred years to live in a world not dominated by either Pax Americana or Pax Britannica. This sort of changing of the guard has never been peaceful. The declines of the Spanish, French and British empires were all accompanied by conflict. The decline of British hegemony was a leading cause of the First and Second World Wars.

What will happen as the U.S. loses its preeminence?

Maybe this will turn out better than similar episodes in the past. Maybe the Chinese will embrace an open society and the rule of law. If you believe that, there is probably no reason to hold any gold.

On the other hand, we may be about to enter a much more turbulent and dangerous era of power politics and international competition.

Not long ago, world gold reserves were mainly in the hands of the U.S. and the Europeans, which accumulated their holdings during their centuries at the top. The U.S. has 75% of its currency reserves in gold. Many other first world powers have comparable proportions.

But that's beginning to change. According to the World Gold Council, China, Saudi Arabia and Russia are now in the top five. Western European countries have been selling gold. If the current financial crisis gets any worse, they may yet sell more.

Emerging markets have been buying. In most cases, gold remains a very small percentage of their total reserves. China, despite its recent buying, holds less than 2% of its currency reserves in gold.

But you have to wonder how long emerging countries will want to hold their reserves in any currency that is controlled by someone else. Vladimir Putin clearly doesn't want to. Gold now accounts for 9% of Russia's reserves, and that figure is rising.

The gold price has had a shakeout since peaking at around $1,900 an ounce a year ago. It fell as low as $1,566 in June. Since then, it has risen to $1,688.

But that shakeout has been exaggerated by the rally in the U.S. dollar over most of the past year. Put another way: Priced in euros, gold is nearly back to its old high. It's 1,343 euros per ounce, just shy of the 1,356 euro record set a year ago.

The most common means of buying gold is either in bullion or through an exchange-traded bullion fund such as the SPDR Gold Shares (GLD: 165.08, 0.77, 0.47%) . And maybe that's sensible.

But you might also take a look at shares in gold-mining companies. They are at, or near, historic lows when compared with the gold price. Contrarians may take that as a buying signal.

The Philadelphia Gold & Silver Index, which tracks the stocks of precious-metal mining companies, stood at 170 on Tuesday -- a level first seen five years ago, in September, 2007, when gold itself was just $730 an ounce. Relative to gold itself, the Philly index is about 60% below the average levels seen since 1985.

Die-hard gold fans will tell you that the mining stocks involve all sorts of extra risks that you don't get with the metal. Companies can be mismanaged. Mining costs go up. Countries can wallop miners with windfall taxes.

They're right on all of the above. On the other hand, the equities are cheap and they do generate cash flow. Barrick Gold (ABX: 38.45, 0.36, 0.95%), the world's biggest, trades at eight times forecast earnings, with a dividend yield of nearly 2%. Newmont (NEM: 49.91, 0.29, 0.58%) is trading at 10 times forecast earnings, yielding 2.8%.

Gramm and Taylor: The Hidden Costs of Monetary Easing Inflation is not the only danger posed by the central bank's ballooning balance sheet. .

By PHIL GRAMM AND JOHN TAYLOR Since mid-September of 2008, the Federal Reserve balance sheet has grown to $2,814 billion from $924 billion as it purchased massive amounts of U.S. Treasurys and mortgage backed securities. To finance those purchases the Fed increased currency and bank reserves (base money).

That kind of monetary expansion would normally be a harbinger of inflation. However, with banks holding excess reserves rather than lending them out—and with velocity (the rate at which money turns over generating national income) at a 50-year low and falling—the inflation rate has stayed close to the Fed's 2% target.

While the Fed considered its previous rounds of easing—QE1, QE2 and Operation Twist—the argument was consistently made that the cost of such actions was low because inflation was nowhere on the horizon. The same argument is now being made as the central bank contemplates QE3 during the Federal Open Market Committee meetings on Wednesday and Thursday.

Inflation is not, however, the only cost of these unconventional monetary interventions. As investors try to predict the timing and effect of Fed policy on financial markets and the economy, monetary policy adds to the climate of economic uncertainty and stasis already caused by current fiscal policy. There will be even greater costs when the economy begins to grow and the Fed, to prevent inflation, has to reverse course and sell bonds and securities to the public.

Since September 2008, the Fed has acquired $1.16 trillion of government securities—in fiscal year 2011 (Oct. 1, 2010-Sept. 30, 2011), the central bank bought 77% of all the additional debt issued by the Treasury. Aside from the monetary impact of these debt purchases, the Fed allowed the federal government to borrow a trillion dollars without raising the external debt of the Treasury and without having to pay net interest on that portion of the debt, since the central bank rebated the interest payments to the Treasury.

When the Fed must, in Chairman Ben Bernanke's words, begin "removing liquidity," by selling bonds, the external debt of the federal government will rise and the Treasury will then have to pay interest on that debt to the public. Selling a trillion dollars of Treasury bonds on the market—at the same time the government is running trillion-dollar annual deficits—will drive up interest rates, crowd out private-sector borrowers and impede the recovery. Debt-service costs to the Treasury will spiral as every 1% increase in federal borrowing costs add $100 billion to the annual budget deficit.

In addition, Operation Twist, by shortening the average maturity date of externally held debt, will require the Treasury to borrow more money sooner when the economy recovers and interest rates start to rise. This too will drive up interest costs and the deficit.

The same problems will occur as the Fed begins to sell its holdings of mortgage-backed securities to reduce the monetary base. When the Fed bought these securities, it may have marginally reduced mortgage interest rates. Selling them during a real recovery will likely cause mortgage rates to rise.

Proponents of QE3 argue that while the Fed's balance sheet must be reduced at some future time, it has the tools to minimize the impact on interest rates by slowing down the pace of the sales. But the Fed's ability to act has already been compromised by its pledge to maintain low interest rates through 2014. Having to time open-market sales to minimize interest-rate increases will further limit the Fed's ability to preserve price stability. In short, the Federal Reserve in future years will face significant constraints that are being forged now.

The Fed could raise the interest rate that it pays banks on reserves they hold in lieu of reducing its balance sheet. Where would the money come from? It has to come out of the money the Fed is currently paying the Treasury, driving up the federal budget deficit. How will taxpayers feel about subsidizing banks not to lend them money?

Rational decision making comes down to a comprehensive measure of cost and benefits. The Fed's effort to use monetary policy to overcome bad fiscal and regulatory policy long ago reached the point of diminishing returns. The benefits of a third round of quantitative easing will almost certainly be de minimis. But when economic growth does return, Fed actions will have to be reversed in an era of rising interest rates, and the marginal cost of a QE3 tomorrow will almost certainly be far greater than the marginal benefit today.

Someday, hopefully next year, the American economy will come back to life. Banks will begin to lend, the money supply will expand, and the velocity of money will rise. Unless the Fed responds by reducing its balance sheet, inflationary pressures will build rapidly.

At that point the cost of our current monetary policy will be all too clear. Like Mr. Obama's stimulus policy, Mr. Bernanke's monetary expansion will ultimately have to be paid for. The Fed softened the recession by its decisive actions during the panic of 2008, but the marginal benefits of its subsequent policy have almost certainly been small. We may find the policies that had little positive impact on the recovery will have high costs indeed when they must be reversed in a full blown expansion.

Mr. Gramm was chairman of the Senate Banking Committee and is senior partner of US Policy Metrics. Mr. Taylor is a professor of economics at Stanford University and a senior fellow at the Hoover Institution. He was undersecretary of the Treasury for international affairs in the first George W. Bush administration.

A version of this article appeared September 12, 2012, on page A15 in the U.S. edition of The Wall Street Journal, with the headline: The Hidden Costs of Monetary Easing.

________________________________________The Consumer Price Index (CPI) was up 0.6% in August To view this article, Click Here Brian S. Wesbury - Chief Economist Bob Stein, CFA - Senior Economist Date: 9/14/2012 The Consumer Price Index (CPI) was up 0.6% in August, matching consensus expectations. The CPI is up 1.7% versus a year ago.“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) rose 0.7% in August and is up 1.6% in the past year.The rise in the CPI in August was due to a 5.6% gain in energy. There were also widespread gains in most other major categories. The “core” CPI, which excludes food and energy, was up 0.1%, versus a consensus expected gain of 0.2%, and is up 1.9% versus last year.Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were down 0.7% in August but are unchanged in the past year. Real weekly earnings are up 0.3% in the past year.Implications: Like yesterday’s report on producer prices, consumer prices came back with a vengeance in August, rising 0.6%. Energy, which was up 5.6%, drove the lion’s share of the price increases. Excluding energy, prices were up 0.1%, the same gain as the “core” CPI, which excludes food and energy. The overall CPI is up only 1.7% in the past year, while “core” prices are up only 1.9%, both lower than the Federal Reserve’s 2% objective. But don’t pop the champagne just yet. We expect inflation to pick up to 3%+ by the end of next year. Monetary policy is loose and rising housing costs (which are measured by rents, not asset values) are going to put upward pressure on the core CPI. Owners’ equivalent rent was up 0.3% in August (the most for any month since 2008) and is up 2% versus a year ago. The ongoing shift from home ownership toward rental occupancy should boost this inflation measure even more in the year ahead. It’s important to recognize that inflation getting above the Fed’s stated objective will not change the Fed’s monetary policy anytime soon. The Fed is now focused on the labor market and will allow inflation to exceed its supposed objective for a prolonged period of time. On the earnings front, “real” (inflation-adjusted) wages per hour were down 0.7% in August but are unchanged from a year ago. Worker hours are up 2% in the past year, which means their purchasing power is still growing.

The next Treasury secretary will confront problems so daunting that even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. .

By George P. Shultz, Michael J. Boskin, John F. Cogan, Allan H. Meltzer and John B. TaylorSometimes a few facts tell important stories. The American economy now is full of facts that tell stories that you really don't want, but need, to hear.

Where are we now?

Did you know that annual spending by the federal government now exceeds the 2007 level by about $1 trillion? With a slow economy, revenues are little changed. The result is an unprecedented string of federal budget deficits, $1.4 trillion in 2009, $1.3 trillion in 2010, $1.3 trillion in 2011, and another $1.2 trillion on the way this year. The four-year increase in borrowing amounts to $55,000 per U.S. household.

The amount of debt is one thing. The burden of interest payments is another. The Treasury now has a preponderance of its debt issued in very short-term durations, to take advantage of low short-term interest rates. It must frequently refinance this debt which, when added to the current deficit, means Treasury must raise $4 trillion this year alone. So the debt burden will explode when interest rates go up.

The government has to get the money to finance its spending by taxing or borrowing. While it might be tempting to conclude that we can just tax upper-income people, did you know that the U.S. income tax system is already very progressive? The top 1% pay 37% of all income taxes and 50% pay none.

Did you know that, during the last fiscal year, around three-quarters of the deficit was financed by the Federal Reserve? Foreign governments accounted for most of the rest, as American citizens' and institutions' purchases and sales netted to about zero. The Fed now owns one in six dollars of the national debt, the largest percentage of GDP in history, larger than even at the end of World War II.

The Fed has effectively replaced the entire interbank money market and large segments of other markets with itself. It determines the interest rate by declaring what it will pay on reserve balances at the Fed without regard for the supply and demand of money. By replacing large decentralized markets with centralized control by a few government officials, the Fed is distorting incentives and interfering with price discovery with unintended economic consequences.

Did you know that the Federal Reserve is now giving money to banks, effectively circumventing the appropriations process? To pay for quantitative easing—the purchase of government debt, mortgage-backed securities, etc.—the Fed credits banks with electronic deposits that are reserve balances at the Federal Reserve. These reserve balances have exploded to $1.5 trillion from $8 billion in September 2008.

The Fed now pays 0.25% interest on reserves it holds. So the Fed is paying the banks almost $4 billion a year. If interest rates rise to 2%, and the Federal Reserve raises the rate it pays on reserves correspondingly, the payment rises to $30 billion a year. Would Congress appropriate that kind of money to give—not lend—to banks?

The Fed's policy of keeping interest rates so low for so long means that the real rate (after accounting for inflation) is negative, thereby cutting significantly the real income of those who have saved for retirement over their lifetime.

The Consumer Financial Protection Bureau is also being financed by the Federal Reserve rather than by appropriations, severing the checks and balances needed for good government. And the Fed's Operation Twist, buying long-term and selling short-term debt, is substituting for the Treasury's traditional debt management.

This large expansion of reserves creates two-sided risks. If it is not unwound, the reserves could pour into the economy, causing inflation. In that event, the Fed will have effectively turned the government debt and mortgage-backed securities it purchased into money that will have an explosive impact. If reserves are unwound too quickly, banks may find it hard to adjust and pull back on loans. Unwinding would be hard to manage now, but will become ever harder the more the balance sheet rises.

The issue is not merely how much we spend, but how wisely, how effectively. Did you know that the federal government had 46 separate job-training programs? Yet a 47th for green jobs was added, and the success rate was so poor that the Department of Labor inspector general said it should be shut down. We need to get much better results from current programs, serving a more carefully targeted set of people with more effective programs that increase their opportunities.

Did you know that funding for federal regulatory agencies and their employment levels are at all-time highs? In 2010, the number of Federal Register pages devoted to proposed new rules broke its previous all-time record for the second consecutive year. It's up by 25% compared to 2008. These regulations alone will impose large costs and create heightened uncertainty for business and especially small business.

This is all bad enough, but where we are headed is even worse.

President Obama's budget will raise the federal debt-to-GDP ratio to 80.4% in two years, about double its level at the end of 2008, and a larger percentage point increase than Greece from the end of 2008 to the beginning of this year.

Under the president's budget, for example, the debt expands rapidly to $18.8 trillion from $10.8 trillion in 10 years. The interest costs alone will reach $743 billion a year, more than we are currently spending on Social Security, Medicare or national defense, even under the benign assumption of no inflationary increase or adverse bond-market reaction. For every one percentage point increase in interest rates above this projection, interest costs rise by more than $100 billion, more than current spending on veterans' health and the National Institutes of Health combined.

Worse, the unfunded long-run liabilities of Social Security, Medicare and Medicaid add tens of trillions of dollars to the debt, mostly due to rising real benefits per beneficiary. Before long, all the government will be able to do is finance the debt and pay pension and medical benefits. This spending will crowd out all other necessary government functions.

What does this spending and debt mean in the long run if it is not controlled? One result will be ever-higher income and payroll taxes on all taxpayers that will reach over 80% at the top and 70% for many middle-income working couples.

Did you know that the federal government used the bankruptcy of two auto companies to transfer money that belonged to debt holders such as pension funds and paid it to friendly labor unions? This greatly increased uncertainty about creditor rights under bankruptcy law.

The Fed is adding to the uncertainty of current policy. Quantitative easing as a policy tool is very hard to manage. Traders speculate whether and when the Fed will intervene next. The Fed can intervene without limit in any credit market—not only mortgage-backed securities but also securities backed by automobile loans or student loans. This raises questions about why an independent agency of government should have this power.

When businesses and households confront large-scale uncertainty, they tend to wait for more clarity to emerge before making major commitments to spend, invest and hire. Right now, they confront a mountain of regulatory uncertainty and a fiscal cliff that, if unattended, means a sharp increase in taxes and a sharp decline in spending bound to have adverse effect on the economy. Are you surprised that so much cash is waiting on the sidelines?

What's at stake?

We cannot count on problems elsewhere in the world to make Treasury securities a safe haven forever. We risk eventually losing the privilege and great benefit of lower interest rates from the dollar's role as the global reserve currency. In short, we risk passing an economic, fiscal and financial point of no return.

Suppose you were offered the job of Treasury secretary a few months from now. Would you accept? You would confront problems that are so daunting even Alexander Hamilton would have trouble preserving the full faith and credit of the United States. Our first Treasury secretary famously argued that one of a nation's greatest assets is its ability to issue debt, especially in a crisis. We needed to honor our Revolutionary War debt, he said, because the debt "foreign and domestic, was the price of liberty."

History has reconfirmed Hamilton's wisdom. As historian John Steele Gordon has written, our nation's ability to issue debt helped preserve the Union in the 1860s and defeat totalitarian governments in the 1940s. Today, government officials are issuing debt to finance pet projects and payoffs to interest groups, not some vital, let alone existential, national purpose.

The problems are close to being unmanageable now. If we stay on the current path, they will wind up being completely unmanageable, culminating in an unwelcome explosion and crisis.

The fixes are blindingly obvious. Economic theory, empirical studies and historical experience teach that the solutions are the lowest possible tax rates on the broadest base, sufficient to fund the necessary functions of government on balance over the business cycle; sound monetary policy; trade liberalization; spending control and entitlement reform; and regulatory, litigation and education reform. The need is clear. Why wait for disaster? The future is now.

The authors are senior fellows at Stanford University's Hoover Institution. They have served in various federal government policy positions in the Treasury Department, the Office of Management and Budget and the Council of Economic Advisers.

Bernanke and the Fed Repeal Einstein Near-zero interest rates, which are expected to last through mid-2015, make a mockery of thrift..By ROBERT L. POLLOCK

Albert Einstein reportedly called compound interest "the most powerful force in the universe." He didn't live long enough to experience Ben Bernanke.

Last week the Federal Reserve chairman told the world that U.S. savers should expect the new normal of near-zero interest rates to last through mid-2015. So compound interest is a concept with which today's early to mid 20-somethings will remain essentially unfamiliar.

For those of us who are slightly older, it seems as if Mr. Bernanke is on a mission to convince us that everything our grandparents told us about household economics was wrong.

My grandmother and grandfather were children of the Depression who built a successful dry-cleaning business with inspiration from—no kidding—a Wall Street Journal article. Then they built an insurance brokerage, and after much saving and hard work retired as the proverbial millionaires next door. They spent money on a house and a boat. But clothes always came from the secondhand shop, and Grandma remained an avid coupon clipper until she and Papa went into an assisted-living facility a few years back.

On family vacations to see them in the Seattle area, I always heard the lecture about the importance of saving, or "making your money work for you." Once on a coupon shopping run, someone asked Grandma why she didn't buy in bulk. My father answered for her: "You wouldn't want your money all tied up in toilet paper."

So thriftiness prompted a few laughs, yes. But there were also real lessons about its virtues.

From a purely financial standpoint, Einstein's miraculous force is most easily expressed in the so-called Rule of 72. That is, at a 7.2% annual rate of return, your money will double in 10 years. The rate is quite feasible in a healthy market (especially in non-inflation-adjusted terms). For people of my grandparents' generation, it came to be seen as the norm. Lately the mainstream press, to its credit, is increasingly cottoning on to the punishing effect that Mr. Bernanke's interest rates have on older people living off savings.

But near-zero interest rates—especially when inflation is running a couple of points higher—are as bad for those of us still in our working years.

Thrift—that is, work and delayed gratification—is both a personal and societal good. It is supposed to allow us to be self-sufficient in future years, support older generations now, and finance the great engine of progress that has been the American economy. But why save when common instruments such as savings accounts, money-market funds and CDs guarantee that you'll lose out to inflation?

For those of us determined to remain savers, low rates force speculation in commodities like gold or oil that we hope won't lose too much value against the dollar. Call it the honest-saver's dilemma. It's one that unelected central bankers don't have the right to force on us, no matter how much their models may tell them low rates will goose the market or ease the deflation of the housing bubble.

That latter rationale is an admission of what serious economists have always known easy money to be: a redistribution of wealth to debtors from savers. Or, as a general rule, from the more virtuous to the less virtuous. This is true when the headline inflation rate is high, but also when it's merely higher than the predictable return on savings.

In an insightful 2009 essay, the Manhattan Institute's Steve Malanga connected the loose mores of the 1970s to the loose monetary policy of that period:

"The economic shocks that followed the tumultuous late 1960s, especially the devastating inflation of the 1970s, reinforced an emerging materialism. . . . The inflation hit hardest those who had embraced the work ethic, destroying lifetimes of savings in unprecedented price spikes and sending the message that 'saving and shunning debt was for saps,' Fortune observed."

From Crafty's post:"Bernanke and the Fed Repeal EinsteinNear-zero interest rates, which are expected to last through mid-2015, make a mockery of thrift.."

Excellent point. Too many of us look at interest rates as the cost of borrowing. It also was the reward and incentive for savings. It is true that the law of compound interest was repealed when interest approached zero and then stayed there long term.

In a healthy economy there is a balance between savings and lending/borrowing. Now the savings is at zero and our borrowing demand is met with pretend money that is artificially manufactured by devaluing our existing supply of money.

Massive injections of stimulus into financial markets by the world's largest central banks are creating a domino effect around the globe, prompting governments from Brazil to Turkey to take steps to keep easy money from flooding in and driving up their currencies.

The Bank of Japan has joined two other central banks in easing monetary policy. Are central banks hinting at more long-term changes? Vincent Cignarella discusses on Markets Hub. Photo: Reuters..The Bank of Japan Wednesday became the latest central bank to ease monetary policy. That follows bold pledges by the world's two biggest central banks to launch open-ended programs to bolster their economies.

The BOJ's efforts were largely designed to stimulate Japan's moribund economy, in part by adding money to financial markets as well as driving down the value of the yen to help the nation's exporters. The bank increased the size of its asset-purchase program to 80 trillion yen ($1 trillion) from 70 trillion yen, and extended the program by six months until the end of 2013.

The Big EasingCentral banks around the world are taking steps to ease monetary policy to bolster their economies and push down their currencies.

View Interactive

..The European Central Bank said earlier this month that it is prepared to buy debt from euro-zone countries that need help in controlling their borrowing costs. The Federal Reserve last week announced a program to buy $40 billion a month in mortgage-backed securities until the economy recovers. Many investors expect the Bank of England to announce its own additional measures to stimulate growth.

Amid the flurry of news from central banks, financial markets have been buoyant but calm. Investors note that stocks and other riskier investments staged big rallies over the summer in part on expectations for easier monetary policy, muting the response to the news. The Standard & Poor's 500 stock index is up 1.7% since last Wednesday, the day before the Fed announced its latest easing.

Given the apparent slowing in the global economy, worries about inflation or asset-price bubbles from central bank efforts to pump money into the financial system have for the most part been pushed to the back burner. But should economic activity pick up, those concerns could quickly revive, especially when it comes to commodities or higher-yielding investments.

And, given that the Fed and other major central banks appear committed to long periods of easy money, investors expect the effects of their actions to play out for months or years.

The efforts of the world's major central banks to stimulate growth in their own economies are already rippling across financial markets.

Investors are flocking to countries and assets that offer higher interest rates than the rock-bottom rates offered in Japan, the U.S. and parts of Europe. That is driving other central banks to employ their own measures, in part to keep their interest rates low or to make their currencies less attractive.

Global RatesRate changes since 2004 in dozens of countries.

View Interactive

. More photos and interactive graphics .A weaker currency makes a country's exports more affordable overseas. At the same time, that makes other nations' exports more expensive. The dynamic raises the incentive for policy makers to devalue their own currencies to remain competitive in global markets.

As with past episodes of aggressive easing by the world's major, developed-market central banks, many investors are homing in on emerging markets offering higher yields and generally healthier economies. The Brazilian real initially jumped 0.7% after the Fed's move, but finished Wednesday's session up 0.3% from a week earlier. The Mexican peso, meanwhile, has gained 2.7% over the past week, the Polish zloty is up 4.3% and the Korean won is up 1.6%.

"All of this cash generated by the Federal Reserve is going to be entering foreign shores," said Komal Sri-Kumar, chief global strategist at TCW. "Emerging markets are going to be tempted to cut interest rates…to offset their currencies appreciating too much."

Brazil took steps Monday to prevent potential waves from the Fed's easing from lifting the value of its currency, conducting so-called "reverse dollar swaps" to prevent its currency, the real, from appreciating. Also Monday, Peru adjusted its intervention strategy toward weakening the Peruvian sol, and on Tuesday Turkey cut interest rates by more than expected.

Unlike past easing episodes that created fears of a "currency war" over tidal waves of money heading toward emerging markets, some in the markets expect a muted response this time.

Officials in South Korea, Thailand, Singapore and the Philippines took a cautious view of the uptick in their currencies following the Fed's announcement, though they all asserted a readiness to smooth out market movement if capital inflows become excessive.

Investors like Alessio de Longis, a portfolio manager at Oppenheimer Funds, which has $182 billion under management, have been buying currencies of countries such as Poland, Norway, Mexico and Canada, whose central banks are seen as less likely to act to push down their currencies against the U.S. dollar.

In the previous round of Fed quantitative easing, the dollar weakened significantly against most currencies. The Wall Street Journal Dollar Index, a measure of the dollar's value against a basket of major currencies, fell 18% in the 13 months from June 2010, when expectations of more Fed stimulus first began to rise, until the $600 billion bond-buying program ended the following summer. The index dropped 20% against the Brazilian real over the same period and 18% versus the Korean won.

The dollar's decline was less pronounced ahead of the announcement last week. The WSJ Dollar Index is down 6% from its 2012 high reached in July.

The current environment is far different from late 2010, when the Fed launched its second major bond-buying program, known as QE2. At the time, the stronger growth in emerging-market nations helped attract investors from advanced economies. The Fed's move spurred loud complaints from Brazil, China and other emerging powers that a surge in "hot money" would destabilize their economies and spur unwanted inflation.

By contrast, U.S. job creation has slowed sharply since the start of the year. The euro zone is already in recession, driven by worsening downturns in southern European nations such as Spain and Italy spreading to their northern neighbors. Most emerging-market economies, in turn, have seen their export sectors struggle as a result of Europe's woes. Almost every major economy in the world is seeing its manufacturing sector contract, according to recent surveys of purchasing managers.

Recent reviews by the International Monetary Fund of the effects of QE2 dismissed many of the concerns that were originally raised about the Fed's bond-buying program.

"The Brazilians and the Chinese, who were among the biggest critics of QE2, I think have changed their view of it in hindsight," said Joseph Gagnon, a senior fellow at the Peterson Institute for International Economics and former Fed economist. "They're just less inclined to worry about it."

Emerging-market nations are less likely to complain this time, after taking their own measures to boost exports.

China may limit the appreciation of its currency, despite appeals from the U.S. to let the yuan rise, but the country "won't risk outright confrontation with Washington in the run-up to the election," said Simon Evenett, an economist at the University of St. Gallen in Switzerland. And Brazil "lost a lot of credibility" already by devaluing its currency, the real, he said.

BEIJING--Chinese and South Korean central-bank officials criticized the U.S. Federal Reserve's latest easing efforts and advocated reducing Asia's dependence on the U.S. dollar.

The comments Thursday, at a joint seminar in Beijing by the two central banks, are the clearest indication yet of a rising backlash in Asia against U.S. monetary policy, suggesting it could speed up the search for alternatives to the dollar as the main global currency.

"The rise in global liquidity could lead to rapid capital inflows into emerging markets including South Korea and China and push up global raw-material prices," said Bank of Korea Gov. Kim Choong-soo. "Therefore, Korea and China need to make concerted efforts to minimize the negative spillover effect arising from the monetary policies of advanced nations."

Chen Yulu, an academic adviser to the People's Bank of China, said Asia needs a "regional core currency" to reduce its dependence on the dollar. China's ultimate goal is for the yuan to be as important as the euro or the dollar, he said.

But he acknowledged that will be a slow process, saying it would be possible for the yuan to be fully convertible by 2020, and that the overall yuan-internationalization process may last until 2040. China strictly controls its currency, though it has made small moves to broaden its use globally in recent years and has also allowed a little more flexibility in its movements.

Facing persistent economic stagnation and high unemployment, the U.S. Federal Reserve earlier this month launched a mortgage-bond buying program, its third round of so-called quantitative easing, or QE3. The Bank of Japan has also expanded its existing easing program, and the European Central Bank has unveiled a plan for potential purchases of the sovereign bonds of stressed euro-zone countries.

The latest round of easing by the U.S. will increase inflationary pressures for emerging-market economies, Mr. Chen said. This contributes to a monetary-policy dilemma for Chinese authorities, he added. While markets have looked for signs of more forceful action by China's leaders to rekindle growth, some officials attribute the government's caution to fears of reigniting inflation.

"On the one hand, China needs to stabilize growth, but on the other hand China is very worried about a property-price rebound," Mr. Chen said.

At the time of the Fed's second round of quantitative easing in 2010, many Asian economies looked to tighten, rather than easing, monetary policy as strong growth made them attractive for speculative money. Currently, with particularly the Chinese economy slowing, hot-money inflows are likely to be more subdued.

Two years ago, several emerging-market central banks also faced a painful choice between raising rates to thwart inflation—risking stronger currencies, which would threaten their exports—and leaving rates alone and tolerating inflation. In 2012, with global growth slowing and inflation less of a threat in Asian emerging markets, central banks can more easily row in the same direction as the Fed and ease credit.

The Korean and Chinese economies are also likely to be affected differently by the Fed's easing. The freer flow of South Korea's currency, the won, means sudden rushes of capital can destabilize the financial system quickly, while China's tighter controls means pressures build more slowly.

Mr. Kim of the Bank of Korea is already on the record fretting about the effects of QE3 on Korea. Earlier this month he said that the Bank of Korea may need to take steps to curb the potential influx of liquidity into South Korea.

The PBOC hasn't made any official comment on the Federal Reserve's latest bond-buying program since it was unveiled. But Chinese policy makers and government scholars have generally reacted negatively, making similar arguments to those from Mr. Kim, predicting inflationary effects on China as commodity prices rise and capital rushes in.

That fits with the past reaction of the PBOC to previous rounds of quantitative easing. In November 2010, PBOC Gov. Zhou Xiaochuan said in a speech that he understands that the Federal Reserve's mandate is only to look after the U.S. economy, but quantitative easing is having adverse effects on the rest of the world.

"A domestic policy may be optimal for the U.S. alone. However at the same time it is not necessarily optimal for the world," he said at the time. "There is a conflict between the U.S. dollar's domestic role and its international settlement role."

A year earlier, Mr. Zhou argued in an influential essay that the world should move to a multicurrency system, including an increased role for Special Drawing Rights, a synthetic international currency created by the International Monetary Fund.

Mr. Kim said Thursday that China and Korea should consider making the two countries' bilateral currency-swap agreement permanent. The three-year agreement allows each country to swap a fixed amount of its own currency for the other's, facilitating trade in the currencies and serving as a possible liquidity booster during times of crisis. South Korea and China agreed last October to almost double the size of their currency swap agreement to 64 trillion won ($57 billion) or 360 billion yuan, from 38 trillion won.

He told reporters on the sidelines of the forum, that there has been no discussion with his Chinese counterparts on the proposal and declined to give a timeline for changes to the swap line.

Both countries should also try to use the yuan and the won in bilateral trade, to cut costs and reduce their reliance on the dollar in transactions, Mr. Kim said. In the long-term, the two countries may consider setting up a won-yuan foreign-exchange market, he added.

Il Houng Lee, a South Korean who currently serves at the chief representative for the IMF in China, said at the seminar that Asian countries can use the yuan as a core currency to settle trade. This can reduce reliance on the dollar and the euro, and can also help improve the efficiency of trade, he said.

But Mr. Lee also echoed Mr. Chen's assessment that yuan internationalization will be gradual, saying it could take more than 30 years.

China's yuan briefly hit its highest level against the U.S. dollar since the launch of a modern Chinese currency trading system in 1994, a remarkable turnaround from its slump earlier this year but one that the government will likely cap to protect China's crucial export sector.

Traders and analysts attributed the recent rally to renewed weakness in the dollar in the wake of the latest round of bond purchases launched by the U.S. Federal Reserve, in a move known as quantitative easing. The Fed's move has pushed down the value of the dollar and led investors to plow capital into emerging markets, such as China, to seek higher returns.

Further aiding the yuan's push: domestic businesses dumped dollars for the yuan on speculation that China will take more monetary-easing measures to arrest the economic slowdown that has raised worries over potential factory closures and job losses. Such a move would typically put short-term downward pressure on the yuan, but any increase in optimism over the Chinese economy could strengthen the currency.

The speculation was triggered by a record amount of cash injected into China's banking system by the central bank this week, as well as the approach of next week's weeklong National Day holiday.

"People don't want to be short of the renminbi during the weeklong holiday in case the government announces any measures to stimulate the economy," WoonKhien Chia, a currency analyst at the Royal Bank of Scotland, referring to the yuan's other name.

Many market players, however, expect the bounce in the yuan to be short-lived as Beijing comes under growing pressure to bolster its economy ahead of a once-a-decade leadership transition set to begin in November. A cheaper yuan makes Chinese goods sold overseas less expensive in dollar terms.

China's central bank, the People's Bank of China, "could still try to push down the yuan's value to help Chinese exporters," Ms. Chia said, adding that she doesn't expect the yuan's strong rally to last the next couple of months.

The yuan has experienced rare ups and downs this year as China moved to let market forces play a bigger role in deciding its value. It consistently weakened against the dollar early this year after a year and a half of appreciation, falling as much as 1.6% against the greenback in late July.

Since then, the Chinese currency has reversed course, and it reached the strongest level since modern trading began in 1994 against the dollar on Friday, at 6.2835 to the dollar. The yuan, which ended at 6.2849 versus the dollar, is now up 0.14% this year. It has risen nearly 32% against the dollar since Beijing dropped its peg to the U.S. currency seven years ago.

The PBOC maintains a tight grip on the yuan's value by setting a daily rate for it, known as the parity rate. In April, it widened the range in which the yuan is allowed to rise and fall in daily trading, to 1% above or below the parity rate from 0.5% previously. The move was a signal that China believes the currency is fairly valued and ready to take a more prominent role globally.

"An interesting phenomenon we're seeing is that the yuan has become more volatile since April, indicating a more market-driven currency regime," said Beng-Hong Lee, Deutsche Bank AG's head of trading in China.

Despite the yuan's strong bounce Friday, many traders pointed out that the 6.3410-to-the-dollar parity rate set by the PBOC before the day's trading began showed that it still guided the yuan weaker than its closing level of 6.2940 at the end of last year, indicating the central bank's desire to keep the yuan from appreciating too fast against the dollar.

Until late last year, when China's slowing economy began to weigh on the yuan, the PBOC had frequently intervened in the currency trading to prevent a sharp jump in the yuan's value. Some traders say the central bank could renew its intervention in the coming weeks should the yuan continue to rise sharply.

In addition, Beijing has its eyes trained more than just the dollar. The European Union so far this year has been China's No. 2 export market after the U.S., and China is believed to also have the incentive to prevent the yuan from appreciating too much from the euro. By reducing the value of the yuan against the dollar, the PBOC could slow the rise of the yuan against the euro, analysts say.

But any fall in the yuan is bound to keep it a political issue in the U.S. during an election year in which the Obama administration continues to publicly push China to let its currency appreciate. Some U.S. businesses and lawmakers have accused Beijing of keeping the yuan artificially weak to help its exporters.

Meanwhile, Republican presidential challenger Mitt Romney has said he would name China a "currency manipulator" if elected.

In June, he conceded the Republican presidential nomination. In August, he turned down a chance to speak at the Republican convention when he reportedly was told he would have to fully endorse Mitt Romney. A video tribute to Mr. Paul ran instead. His delegates were barred from and accused of disrupting the party proceedings. And now through three presidential debates, the Texas congressman's pet issue, monetary policy, has been ignored. "They don't want to talk about it," Mr. Paul said in an interview Tuesday. He added sarcastically: "It's not important enough. It's only half of every single transaction in the world."

You would think that even if Ron Paul the presidential candidate has failed, Ron Paul the Fed critic would be alive and well, front and center in the national debate. After all, any economist will tell you we are living in an unprecedented time of active central banking.

Ben Bernanke, chairman of the U.S. Federal Reserve, has embarked on the third part of an already $2.3 trillion easing program aimed at stimulating the U.S. economy.

Mario Draghi, president of the European Central Bank, has bought €210 billion ($272.4 billion) in sovereign bonds and promised to buy more to keep interest rates low to spur growth in the European Union. Combined with bank lending, the ECB's balance sheet is now more than $4 trillion.

Supporters argue that central bankers are setting the stage for a robust recovery. Critics argue that these reserve banks are making the problem worse by trying to fix one credit bubble with another.

Yet as controversial and full of impact as these moves have been, they have hardly captured center stage in the political realm. You're more likely to hear President Barack Obama or Mr. Romney talk about "binders of women" or "bayonets and horses" than monetary policy.

Mr. Paul is realistic but disappointed. For a politician who ran three presidential campaigns—1988, 2008 and 2012—in which overhauling the Fed was a central platform, relegating the issue to secondary status on the campaign trail has produced mixed feelings.

"They'd just as soon not talk about it too much," Mr. Paul said. Still he added that he is "always amazed at the amount of attention we've gotten over the last several years from the grass roots, but it's coming from the grass roots. It's not coming from the leadership of the Democratic or Republican parties."

The candidates haven't completely ignored the issue. Mr. Obama has stood by Mr. Bernanke and his policy at the Fed. The president lobbied hard for Mr. Bernanke and renominated him in 2010. Mr. Romney has criticized the Fed's actions as inflationary and punchless. He has promised to replace Mr. Bernanke but hasn't hinted at whom he would tap for the job.

Mr. Romney also has said he would consider a gold commission that would study the possibility of tying the value of a dollar to the price of gold.

Mr. Paul and his devoted following argue that it's not enough. Mr. Paul said most of our economic ills can be traced to Fed policy run amok. He finds it ironic that the candidates talk about the recession, the jobs lost to it, bailouts, the national deficit and debt swelled by it, without mentioning monetary policy.

"I wish somebody would ask the question," he said. "I did my best to call attention to it."

Mr. Paul said that with a hint of finality. After all, he announced last summer that this term in Congress would be his last. He will no longer have Capitol Hill as his stage. Not to worry, he adds. There's a lot of criticism about monetary policy happening outside of Washington. He says he would serve, if asked, on a gold commission or in a role related to his cause.

Ultimately, however, if his own accounting of the situation is correct, whoever is in the White House during the next four years will have to consider the Fed and its impact. Just last week, Mr. Paul noted, the Fed bought $20 billion in Treasurys, while foreign banks bought $22 billion. "This wasn't money that was earned," he said. "How long can this go on?"

Debate about the Fed's role "will come back," Mr. Paul said. "It will be forced on the front burner because as long as we keep doing this and the longer the delay, the bigger the problem becomes."

BEIJING—The once-predictable Chinese yuan has become increasingly volatile, a development that signals a stronger role for markets in the currency's moves but poses greater foreign-exchange risks for businesses and investors.

China still keeps a tight grip on the yuan by limiting its trading within a range. In terms of volatility, the currency still pales in comparison to more freely traded counterparts.

But since late September, as China's economy started to show signs of stabilizing, traders betting on the yuan's rise have pushed the currency to the upper limit of the Beijing-imposed trading range more frequently, according to an analysis by The Wall Street Journal. The intraday moves have been much bigger than suggested by changes in the daily rate set by China's central bank. Traders say they are increasingly taking advantage of an April move by the People's Bank of China to expand the yuan's trading territory.

On Thursday, the yuan again hit the upper limit of its daily trading band, finishing at the day's high of 6.2417 to the dollar. That level is the highest since the launch of modern foreign-exchange trading in China in 1994.

China's lighter hand on the currency is one reason the yuan has had a rare bumpy ride this year. The yuan is up 0.8% against the U.S. dollar for the year, after falling as much as 1.6% in July. Back then, as investors worried over China's economic slowdown, traders sold the yuan, aiding Beijing's effort to make it weaker against the dollar.

The new volatility underscores Beijing's increasing willingness to allow market forces to play a bigger role in setting the yuan's value. "The PBOC is not intervening much these days, and the market is taking full advantage of the widened trading band," said analyst WoonKhien Chia at Royal Bank of Scotland RBS.LN -0.25%.

PBOC officials didn't respond to requests for comment.

The yuan's recent rise comes as China prepares for a once-a-decade leadership change. Some market analysts expect the transition to pave the way for more monetary-easing measures aimed at keeping China's economy humming. Such measures typically put short-term downward pressure on a country's currency, but any increase in optimism over the economy could help strengthen the yuan.

China's growing flexibility also could help deflect criticism by the U.S., where the yuan's value has become an issue in the current election campaign.

The Chinese currency also has been buffeted by the same forces hitting other Asian markets. Money has poured into Asian assets as investors seek higher returns in response to declines in interest rates in Western countries.

Chinese stocks have risen recently after a dismal year, in part because of the inflow of new cash. Net flows of cash into Hong Kong and mainland China equity mutual funds have totaled $1.3 billion over the past four weeks, the most for any part of Asia excluding Japan, according to research by Deutsche Bank DBK.XE -0.58%.

Chinese officials have said the country will push ahead with establishing a market-based exchange-rate system, whereby the yuan would move up and down like any other major currency. The change is part of China's plan to overhaul its creaky financial sector, elevate the country's status in the international monetary system and someday challenge the U.S. dollar as the de facto global currency.

Russian Prime Minister Vladimir Putin said Thursday that Russia and China should move toward settling trade in their own currencies and that full convertibility for the yuan is "a matter of time."

China's growing flexibility also could help deflect criticism by the U.S., where the yuan's value has become an issue in the current election campaign. Some U.S. businesses and lawmakers say China undervalues the yuan to make its exports more attractive. Republican contender Mitt Romney has said he would label China a currency manipulator on his first day in office.

The swings are causing problems for exporters like Du Hanbing, who runs a business in the Chinese city of Shenzhen that makes embossing machines and sells them in the U.S. and Canada. Mr. Du said he usually would adjust prices based on how the yuan is trading.

"If the yuan depreciates, I would bump up the dollar prices for our products, and vice versa," he said. "But nowadays, the yuan seems to be switching courses faster than we could adjust our prices."

The volatility has increased the yuan's appeal for financial investors like hedge funds that profit from swings either way.

Andy Seaman, a portfolio manager at hedge-fund firm Stratton Street Capital, said he has been increasing his exposure to renminbi all year. He manages a yuan-bond fund with about $180 million in assets under management. It buys Asian dollar-denominated bonds and enters into forward contracts that allow the fund to get renminbi by selling dollars.

The fund is up 2.8% this month and nearly 23% this year, he said. It has benefited from both yuan appreciation and rising yields on the underlying bonds. Mr. Seaman said the fund also has benefited from the yuan's increased volatility. Prices on the yuan-linked forward contracts he buys are lower than they otherwise would be, reflecting the uncertain outlook, leaving his fund with bigger gains if the yuan continues to appreciate.

The PBOC keeps a leash on the yuan's trading in mainland China by setting a daily rate for it, known as the parity rate. In April, it widened the range in which the yuan is allowed to rise and fall daily to 1% above or below the parity rate from 0.5% previously. The move reflected China's belief that the currency is fairly valued and ready to take a more prominent role globally.

The yuan consistently weakened against the dollar early this year amid worries over China's economy. Since the summer, the yuan has reversed course.

Still, it remains a stable currency compared with many others. The yuan has fluctuated 2.1% in the past month, compared with 6.52% for the South Korean won, 4.74% for the Singapore dollar and an average 4.85% for Asian currencies, according to RBS.

In the final televised presidential debate, Mitt Romney promised that if he is elected on Nov. 6 he will "label China a currency manipulator" on "day one" of his presidency. He also pledged to pay more attention to trade with Latin America, noting that the region's "economy is almost as big as the economy of China."

To be consistent, Mr. Romney should call out the Federal Reserve on day two for engaging in its own currency manipulation by way of "quantitative easing," which undermines the value of the dollar relative to Latin American currencies. After all, no one can expect a healthy trade relationship with the region if the Fed is goading U.S. trading partners into competitive currency devaluations.

Related Video..But that's not the main reason why a new U.S. president should want to rein in the Fed. The greater worry is the one that International Monetary Fund Managing Director Christine Lagarde warned about at the IMF's October meeting in Tokyo. Easy money from the central banks of developed countries, she said, creates the risk of "asset price bubbles" in emerging economies.

If history is any guide, such bubbles are likely to lead to financial crises that in turn lead to setbacks in development. Aside from the damage that does to middle-income countries like Brazil, emerging-market financial crises also undermine U.S. economic and geopolitical objectives.

From September 2008 through the end of 2011, Mr. Bernanke's Fed created $1.8 trillion in new money. But Fed policy makers were only warming up. In September they announced that they will engage in a third round of quantitative easing—that is, more money creation, ostensibly to spur growth and thus bring down unemployment—at a rate of $40 billion per month with no deadline.

With so many dollars sloshing around in U.S. banks and with a fed-funds rate set near zero, investors have found it hard to earn a decent return. The scavenger hunt for yield has sent dollars rushing into emerging markets where, as they are converted into local currency, they put upward pressure on the exchange rate.

Brazil has experienced this in spades. Brazilian Finance Minister Guido Mantega has complained bitterly about it because in his mind the higher relative value of the real makes Brazil worse off.

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U.S. Federal Reserve Chairman Ben Bernanke.In Mr. Bernanke's remarks at the IMF meeting in Tokyo, he suggested that emerging economies ought to simply let their currencies appreciate rather than "resist appreciation" through "currency management." To do otherwise, he noted, can mean "susceptibility to importing inflation," which means making Brazilians poorer.

Mr. Bernanke has a point. The closed, heavily regulated Brazilian economy is held back by too much government, not a strong real.

Indeed, the quest for a weak currency to boost exports is counterproductive if the goal is development. As former Salvadoran Finance Minister Manuel Hinds wrote earlier this month for the Atlantic magazine's new online publication, Quartz, the Brazilian boom in industrial production, which stirred "the idea that [Brazil] would become the engine of the world," came from "the inflow of dollars that Mr. Mantega hates so much."

But Mr. Bernanke's dismissive posture toward emerging economies missed the larger point. As Mr. Hinds also pointed out, "the exceptional prosperity would last only as long as the dollars kept on coming." And there's the rub. The boom is an artificially high valuation of the Brazilian economy, produced only because Mr. Bernanke has made the world awash in dollars.

The sustainability issue is troubling. As Bank of England Governor Mervyn King noted in a speech last week: "When the factors leading to a downturn are long-lasting, only continual injections of [monetary] stimulus will suffice to sustain the level of real activity. Obviously, this cannot continue indefinitely."

The Americas in the NewsGet the latest information in Spanish from The Wall Street Journal's Americas page. .In a perfect world, the end of the dollar flows—or a downturn in soaring commodity prices when investor expectations begin to shift—would simply mean an economic slowdown. But booms are almost always accompanied by credit expansions, and Brazil's is no different. Since 2004, bank credit has grown to 167% of gross domestic product from 97%.

What happens when a leveraged economy, living on accommodative monetary policy, suddenly finds the spigot turned off? Ask Americans who were on the receiving end of Fed tightening in 2007.

In Tokyo, Mr. Bernanke spoke to the world the way former U.S. Treasury Secretary John Connally spoke to the G-10 in Rome in 1971 after the U.S. abandoned the Bretton Woods agreement that had tied the dollar to gold: Get over it. We do what we want.

That attitude wasn't constructive for Americans or the rest of the world. If some future U.S. president intends to restore American prestige in economic leadership, restoring Fed credibility as a responsible manager of the world's reserve currency is a necessary first step

Turning from green to redThe yuan is displacing the dollar as a key currencyOct 20th 2012 | HONG KONG | from the print edition

..IN TOKYO last week the bigwigs of international finance paid close attention to a speech by Ben Bernanke, chairman of America’s Federal Reserve. His speech urged them, in effect, to pay less attention. Many policymakers in emerging markets complain that Fed easing destabilises their economies, contributing to higher inflation and asset prices. Mr Bernanke pointed out that emerging economies can insulate themselves from his decisions by simply decoupling their currencies from the dollar. It is their habit of shadowing America’s currency, however loosely, that obliges emerging economies to ease monetary policy whenever he does.

Policymakers may heed Mr Bernanke’s words—freeing them to ignore his decisions—sooner than he thinks. In a (more thinly attended) speech on the same day, a deputy governor of China’s central bank pointed out that China no longer hoovers up dollar reserves with its past abandon. And according to a new study by Arvind Subramanian and Martin Kessler of the Peterson Institute for International Economics in Washington, DC, the dollar’s influence is waning in the emerging world. Currencies that used to shadow the greenback are no longer following it so closely. Some are floating more freely. But in other cases they are steadily falling under the spell of a different currency: the yuan.

Some inflation-prone emerging economies, such as Ecuador, have adopted the dollar as their official currency. Others, such as Jordan, peg their exchange rate to it. These official policies are one measure of the dollar’s international role. Messrs Subramanian and Kessler use a different measure, based on the way exchange rates behave in the market. They identify currencies that tend to move in sympathy with the dollar in its daily fluctuations against a third currency, such as the Swiss franc. This “co-movement” could reflect market forces, not official policies. It need not be a perfect correlation. It need only be close enough to rule out coincidence.

Based on this measure, the dollar still exerts a significant pull over 31 of the 52 emerging-market currencies in their study. But a number of countries, including India, Malaysia, the Philippines and Russia, appear to have slipped anchor since the financial crisis. Comparing the past two years with the pre-crisis years (from July 2005 to July 2008), they show that the dollar’s influence has declined in 38 cases.

The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a yuan standard. Seven currencies in the region now follow the yuan, or redback, more closely than the green (see chart). When the dollar moves by 1%, East Asia’s currencies move in the same direction by 0.38% on average. When the yuan moves, they shift by 0.53%.

Of course, the yuan does not yet float freely itself. Since June 2010 it has climbed by about 9% against the dollar, fluctuating within narrow daily bands. Its close relationship with the greenback poses a statistical conundrum for Messrs Subramanian and Kessler. How can they tell if a currency is following in the dollar’s footsteps or the yuan’s, if those two currencies are moving in close step with each other? In previous studies, wherever this ambiguity arose, currencies were assumed to be following the dollar. The authors relax this assumption, arguing that the yuan now moves independently enough to allow them to distinguish its influence. But some of the yuan’s apparent prominence may still be the dollar’s reflected glory.

Outside East Asia, the redback’s influence is still limited. When the dollar moves by 1%, emerging-market currencies move by 0.45% on average. In response to the yuan, they move by only 0.19%. But China’s currency will continue to grow in stature as its economy and trading activity grow in size. Based on these two forces alone, China’s currency should surpass the dollar as a key currency some time around 2035, Mr Subramanian guesses. By that point, the Fed chairman will be the one pulling in the smaller audiences.

FWIW IMHO we are going to be quite sorry when the dollar loses what remains of the respect it holds. Amongst a number of important reasons is that our numbers (debt as a % of GDP, that sort of thing) are nearly fully as bad as Greece's-- the main difference being that we print the currency in which our debt is denominated. When foreign buyers for our debt disappear, the Fed, which already buys some 60%+ of the debt will step in. How does this not lead to a serious inflation and interest rate spike? With the interest rate spike, our deficit takes off, and Weimar monetary policy beckons its bony hand , , ,

FWIW IMHO we are going to be quite sorry when the dollar loses what remains of the respect it holds. Amongst a number of important reasons is that our numbers (debt as a % of GDP, that sort of thing) are nearly fully as bad as Greece's-- the main difference being that we print the currency in which our debt is denominated. When foreign buyers for our debt disappear, the Fed, which already buys some 60%+ of the debt will step in. How does this not lead to a serious inflation and interest rate spike? With the interest rate spike, our deficit takes off, and Weimar monetary policy beckons its bony hand , , ,

Peter Schiff, the divisive investor and commentator that predicted the subprime/real-estate bubble, is forecasting a U.S. dollar and bond crisis over the next couple of years. Schiff blames intervened bond markets, where rates are artificially and excessively low, and expects the coming crisis to blow the 2008-9 financial crisis out of the water.

There is little doubt that the Federal Reserve, with Chairman Ben Bernanke at the helm, is holding markets by the hand. Bernanke, himself a divisive figure, has done all he can to push interest rates lower, using quantitative easing and Operation Twist once nominal rates had hit the zero-range. While many believe ultra-loose monetary policy is dangerous, Schiff thinks it will lead to a catastrophic correction.

“The more you delay it, the bigger it will be,” Schiff tells Forbes in a phone interview Tuesday, “so we need to raise interest rates during the recession to confront the inefficiencies.” Schiff, who runs Euro Pacific Capital and is seen by many as permanently bearish, argues that government-intervened bond markets are leading to massive distortions in capital allocation that have only been exacerbated as the Fed reacted to the last couple of recessions.

Recent market behavior supports his thesis that massive dislocations in bond yields distort reality. Ten-year Treasury yields had traded in a narrow-range for about four months, on the presumption that a weak economy would continue to count on Bernanke’s monetary support (particularly of the bond market). On March 13, the policy-setting Federal Open Market Committee (FOMC) acknowledged an improved recovery, but did not mention more quantitative easing, or bond purchases, were on the way, sparking a violent sell-off in Treasuries (exacerbated by JPMorgan’s dividend announcement the same day, which triggered a rally in financial stocks) as market players fled a bond rally they considered fixed by the Fed.

While Bernanke delivered calm to bond markets on Monday in a speech that promised “continued accommodative policies,” the violence of the sell-off speaks to Schiff’s argument. “We consume more than we produce and we borrow abroad, but we are never going to be able to pay them back,” says Schiff.

The controversial investor and commentator expects a massive crash over the next two to three years as a bond market bubble, coupled with the U.S. dollar, collapses under the weight of excessive debt. Schiff, like PIMCO’s Bill Gross, doesn’t believe in the current deleveraging cycle. While households have reduced their leverage, government debt has ballooned on the back of stimulus programs, but, argued Schiff, the government’s debt is the people’s debt, thus overall leverage has actually increased.

In CNBC interview Wednesday, Schiff called Bernanke “public enemy number one” and warned that banks would crash if the bond market collapses. While most major banks, including the likes of JPMorgan, Wells Fargo, and even Bank of America, passed the Fed’s strenuous stress tests, which stipulated a massive decline in equity and real estate prices, Schiff still believes they’re in trouble. “The Fed didn’t ask the banks to stress test a big drop in the bond market because that’s what coming, and the banks would fail that,” he said.

Schiff cites the rising price of gold as evidence that U.S. dollar debasement, and inflation, are higher than the Fed, and consumer price data, suggest. Following the Austrian economic tradition, Schiff believes that only a massive correction, via a deflationary recession, can set the system straight. “In a deflation, real wages will rise because the cost of goods will fall faster,” he says, adding that the government should accompany the correction by lowering taxes and cutting back on regulation.

While Schiff does suggest saving in gold, he understands the limitations of the investment. “If you invest in gold, then the economy doesn’t benefit from savings, I want investment to go to plants and equipment.”

The system, he argues, is as broken as it was before the financial crisis. Schiff, who was very prescient in his forecast and prediction of how the subprime debacle would filter through to the broader real estate market and thus bring down the economy, believes complacency is widespread. “All of the people who were 100% wrong [back in ‘08] are saying that everything’s OK [now]. I am telling them they didn’t solve the problem and are making it so much worse.”

Schiff, who knows how to build his case, concludes it thusly: “I didn’t get lucky, I just understood the problem, and we are going to get another big one coming soon.”

What is Money When the System Collapses?Mac SlavoDecember 29th, 2009SHTFplan.com

What is money?

Economist Mike Shedlock defines money through the eyes of Austrian economist Murray N. Rothbard as “a commodity used as a medium of exchange.”

“Like all commodities, it has an existing stock, it faces demands by people to buy and hold it. Like all commodities, its priceť in terms of other goods is determined by the interaction of its total supply, or stock, and the total demand by people to buy and hold it. People buyť money by selling their goods and services for it, just as they sellť money when they buy goods and services.”

What is money when the system collapses and the SHTF?

In disaster situations, the value of money as we know it now changes, especially if we are dealing with a hyperinflationary collapse of the system’s core currency. This article discusses money as a commodity in an event where the traditional currency (US Dollar) is no longer valuable.

In a collapse of the system, there will be multiple phases, with the first phase being the “crunch”, as discussed in James Rawles‘ book Patriots. The crunch is the period of time directly preceding a collapse and the collapse itself.

Traditional Currency

Initially, the traditional currency system will maintain some value, though it may be rapidly depreciating in buying power. For those with physical, non-precious metal denominated currency on hand (paper dollars, non-silver coins), spending it as rapidly as possible is the best approach.

It is during the crunch that ATM machines around the country will run out of currency as people aware of the rapidly devaluing dollar will be attempting to withdraw as much money as possible. This immediate increase in money supply, coupled with the population’s general knowledge of the currency depreciation in progress, will lead to instant price increases for goods, especially essential goods.

If your physical cash has not been converted into tangible assets, this would be the time to do so. Acquiring as much food, fuel, clothing and toiletry items as possible would be the ideal way to spend remaining cash before it completely collapses to zero, as it did in the Weimar inflation in 1930′s Germany, or Zimbabwe’s hyperinflation in recent years.

Precious Metals

During the initial phase of the ‘crunch’ precious metals will be a primary bartering tool, but this may not last long. The old survivalist adage “you can’t eat your gold” will become apparent very quickly. In a total breakdown of the system, food, water and fuel will be the most important tangible goods to acquire.

Consider someone who has a two week or one month supply of food on hand. Do you believe they would be willing to part with that food for some precious metals? The likely answer is no. There will be almost no bartering item that one would be willing to trade their food for once it is realized that food supply lines have been cut.

That being said, since most will not barter their food, not even for fuel, the next recognized medium of exchange by merchants, especially those selling fuel, will be precious metals. For the initial crunch, silver coins, especially recognizable coins like 90% silver quarters, dimes and half dollars, along with one (1) ounce government mint issued silver coins like US Silver Eagles, will be accepted by some, probably most, merchants. For those trying to flee cities to bug-out locations, silver coins of the aforementioned denominations may be a life saver, as they can be used to acquire fuel. While we recommend having gold, as well, the issue with gold is that its value is so much higher than that of silver, that breaking a one ounce gold coin into 10 pieces just to buy a tank of gas will not be practical. It is for this reason that having silver on hand is highly recommended. Packing at least $25 – $50 of silver coins in each bug-out bag would be a prudent prepping idea.

In a total SHTF scenario, silver and gold may eventually break down as a bartering unit, as contact with the “outside” world breaks down. One reason for this, is that the fair value price of precious metals will be hard to determine, as it will be difficult to locate buyers for this commodity.

This, however, does not mean that you should spend all of your precious metals right at the onset of a collapse. Precious metals will have value after bartering and trade is reestablished once the system begins to stabilize. Once stabilization begins, the likely scenario is that precious metals will be one of the most valuable monetary units available, so having plenty may be quite a benefit. At this point, they could be used to purchase property, livestock, services and labor.

Water

Water is often overlooked as a medium of exchange, though it is one of the most essential commodities for survival on the planet. Had individuals in New Orleans stockpiled some water supplies during Hurricane Katrina, much of the loss of life there could have been avoided.

For those bugging out of cities, it will be impractical to carry with them more than 5 – 10 gallons of water because of space limitations in their vehicles. Thus, having a method to procure water may not only save your life, but also provide you with additional goods for which you can barter.

An easy solution for providing yourself and others with clean water is to acquire a portable water filtration unit for your bug-out bag(s). While they are a bit costly, with a good unit such as the Katadyn Combi water filter running around $150, the water produced will be worth its weight in gold, almost literally. This particular filter produces 13,000 gallons of clean water! A Must have for any survival kit.

Because we like reserves for our reserves, we’d also recommend acquiring water treatment tablets like the EPA approved Katadyn Micropur tabs. If your filter is lost or breaks for whatever reason, each tablet can purify 1 liter of water. In our opinion, the best chemical water treatment available.

Clean water is money. In a bartering environment, especially before individuals have had time to establish water sources, this will be an extremely valuable medium of exchange and will have more buying power than even silver or gold on the individual bartering level.

Food

In a system collapse, food will be another of the core essential items that individuals will want to acquire. Survival Blog founder James Rawles suggests storing food for 1) personal use 2) charity 3) bartering.

Dry goods, canned goods, freeze dried foods can be used for bartering, but only if you have enought to feed yourself, family and friends. They should be bartered by expiration date, with those foods with the expiration dates farthest out being the last to be traded. You don’t know how long the crunch and recovery periods will last, so hold the foods with the longest expiration dates in your posession if you get to a point where you must trade.

Baby formula will also be a highly valued item in a SHTF scenario, so whether you have young children or not, it may not be a bad idea to stockpile a one or two week supply. (For parents of young children, this should be the absolute first thing you should be stockpiling!). In addition to water, baby formula may be one of the most precious of all monetary commodities.

Another tradeable food good would be seeds, but the need for these may not be apparent to most at the initial onset of a collapse, though having extra seeds in your bug-out location may come in handy later.

Fuel

Fuel, including gas, diesel, propane and kerosene will all become barterable goods in a collapse, with gas being the primary of these energy monetary units during the crunch as individuals flee cities. For most, stockpiling large quantities will be impractical, so for those individuals who prepared, they may only have 20 – 50 gallons in their possession as they are leaving their homes. If you are near your final bug-out destination, and you must acquire food, water or firearms, fuel may be a good medium of exchange, especially for those that have extra food stuffs they are willing to trade.

Though we do not recommend expending your fuel, if you are left with no choice, then food, water and clothing may take precedence.

For those with the ability to do so, store fuel in underground tanks on your property for later use and trading.

Firearms and Ammunition

Though firearms and ammunition may not be something you want to give up, those without them will be willing to trade some of their food, precious metals, fuel and water for personal security. If the system collapses, there will likely be pandemonium, and those without a way to protect themselves will be sitting ducks to thieves, predators and gangs.

Even in if you choose not to trade your firearms and ammo during the onset of a collapse, these items will be valuable later. As food supplies diminish, those without firearms will want to acquire them so they can hunt for food. Those with firearms may very well be running low on ammunition and will be willing to trade for any of the aforementioned items.

In James Rawles’ Patriots and William Forstchen’s One Second After, ammunition was the primary trading good during the recovery and stabilization periods, where it was traded for food, clothing, shoes, livestock, precious metals and fuel.

Clothing and Footwear

We may take it for granted now because of the seemingly endless supply, but clothing and footwear items will be critical in both, the crunch and the phases after it. Having an extra pair of boots, a jacket, socks, underwear and sweaters can be an excellent way to acquire other essential items in a trade.

As children grow out of their clothes, rather than throwing them away, they will become barterable goods.

It is recommended that those with children stock up on essential clothing items like socks, underwear and winter-wear that is sized a year or two ahead of your child’s age.

Additional Monetary Commodities

The above monetary units are essential goods that will be helpful for bartering in the initial phases of a collapse in the system. As the crunch wanes and recovery and stabilization begin to take over, other commodities will become tradeable goods.

In A Free Falling Economy Makes Bartering Go Boom, Tess Pennington provides some other examples of items that will be bartering goods during and after a crunch including, vitamins, tools, livestock, fishing supplies, coffee and medical supplies.

Another important monetary commodity after the crunch will be trade skills. If you know how to fish, machine tools, hunt, sew, fix and operate radioes, fix cars, manufacture shoes, or grow food, you’ll have some very important skills during the recovery period.

Will China Make the Yuan a Gold-Backed Currency?Posted on May 22, 2012 by WashingtonsBlog If China Backs Its Currency with Gold, It Could Have Profound Effects for Investors … and Consumers

Larry Edelson – - writes today:

I know for a fact that Beijing wants its yuan to eventually become a gold-backed currency, much like the Swiss franc was originally. Backing the yuan with some gold will certainly help it become a major international currency.

Edelson is a financial adviser who travels frequently to Asia, a former high-volume gold trader who is interviewed a lot in the mainstream financial media.

I have no idea whether Edelson is right or not. But he’s not the first to make the claim.

Doug Casey says that if one country – such as China – switches to a gold-backed currency, the dollar will be toast:

All it will take for the world to realize that U.S. dollars are nothing more than hot potatoes is for one country (Doug postulated that maybe China would be first) to introduce a gold-backed currency. If China introduced a gold-backed yuan, for example, who on earth would want anything to do with U.S. dollars?

Similarly, SafeHaven points out:

Suppose a large exporter, such as China, which undervalues its currency and runs a large trade surplus as a result, takes a huge radical step and goes all the way to a 100%-reserve gold currency. The ultimate hard currency. If this succeeds, China is the new England – the financial capital of the world, forever. Everyone else’s money? In a word: pesos. Hard currency is Chinese currency. China’s natural supremacy over the barbarian kingdoms of the West is restored.

Goldcore argues:

China is clearly trying to position the yuan or renminbi as the alternative global reserve currency. The Chinese likely realise that they will need to surpass the Federal Reserve’s official, but unaudited, gold holding of 8,133.5 tonnes.

***

World Bank President Robert Zoellick recently mooted the possibility of a return to some form of gold standard. It seems extremely likely that senior and influential Chinese policy makers, bankers and government officials may be having similar thoughts.

Simit Patel writes:

China’s central bank continues to aggressively accumulate gold. Is this a setup for making the renminbi a gold-backed currency? Many have speculated that this is the game plan. Certainly a currency that is gold-backed will have appeal as a reserve currency capable of storing wealth; indeed, the reason why the US was able to position itself as a reserve currency is largely because it was once pegged to gold.

MaxKeiser says:

China is clearly trying to position the yuan or renminbi as the alternative global reserve currency. The Chineselikely realise that they will need to surpass the Federal Reserve’s official, but unaudited, gold holding of 8,133.5 tonnes. China is the sixth largest holder of gold reserves in the world today and officially has reserves of 1054.1 tonnes which is less than half those of even Euro debtor nations France and Italy who are believed to have 2,435.4 and 2,451.8 tonnes respectively.

***

[This] game theory article is great because it points out that China does not need to amass a gold stock similar to the US, it can simply go to a gold standard now and effect a simultaneous devaluation against the dollar (as game theory dictates that the US and all other CB’s would be forced to follow China’s lead, or risk losing all their capital as investors buy the only gold backed currency in the world).

And Wikileaks noted several reasons for China’s stocking up on gold. ZeroHedge summarizes:

As the following leaked cable explains, gold is, to China at least, nothing but the opportunity cost of destroying the dollar’s reserve status. Putting that into dollar terms is, therefore, impractical at best, and illogical at worst. We have a suspicion that the following cable from the US embassy in China is about to go not viral but very much global, and prompt all those mutual fund managers who are on the golden sidelines to dip a toe in the 24 karat pool. The only thing that matters from China’s perspective is that “suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.” Now, what would happen if mutual and pension funds finally comprehend they are massively underinvested in the one asset which China is without a trace of doubt massively accumulating behind the scenes is nothing short of a worldwide scramble, not so much for paper, but every last ounce of physical gold…

From Wikileaks:

3. CHINA’S GOLD RESERVES

“China increases its gold reserves in order to kill two birds with one stone”

“The China Radio International sponsored newspaper World News Journal (Shijie Xinwenbao)(04/28): “According to China’s National Foreign Exchanges Administration China ‘s gold reserves have recently increased. Currently, the majority of its gold reserves have been located in the U.S. and European countries. The U.S. and Europe have always suppressed the rising price of gold. They intend to weaken gold’s function as an international reserve currency. They don’t want to see other countries turning to gold reserves instead of the U.S. dollar or Euro. Therefore, suppressing the price of gold is very beneficial for the U.S. in maintaining the U.S. dollar’s role as the international reserve currency. China’s increased gold reserves will thus act as a model and lead other countries towards reserving more gold. Large gold reserves are also beneficial in promoting the internationalization of the RMB.”

The Federal Reserve meets this week. Analysts are supposing and predicting what the statement will say and if the Fed will change its economic projections.We think this is all much ado about not much. The Fed won’t change the federal funds rate, the short-term interest rate it targets for interbank lending. It appears that Ben Bernanke wants it where it is for the rest of our lifetimes. And it is way too low. Nominal GDP – real GDP growth plus inflation – grew at a 5.5% annual rate in Q3 and is up 4.2% in the past year. With nominal growth this far above the funds rate, monetary policy is truly accommodative.So, the key issue on the table is what the Fed will do about “Operation Twist.” Since September 2011, the Fed has been buying $45 billion per month in long-term Treasury securities and simultaneously selling $45 billion in short-term securities. The program is designed to bring down long-term interest rates, but is supposed to end at year end.Our best bet is that given how aggressively the Fed wants to use monetary policy to try to stimulate the economy – despite the fact that fiscal and regulatory mistakes are the real problem – the Fed is not willing to just let Twist die. Instead, it’s likely to continue to purchase $45 billion per month in long-term securities and just stop selling the short-term securities.What’s important to recognize is that this would not be some cosmetic change in policy. Operation Twist shifted the composition of the Fed’s balance sheet (more long-term, less short-term), but it did not change the size of the balance sheet. By contrast, continuing to buy long-dated Treasuries but no longer selling shorter-term Treasuries would add to the size of the balance sheet and can be looked at like QE4.If the Fed embarks on this for the next year it would add about $540 billion to a balance sheet that is now $2.8 trillion. The Fed is already committed to buying $40 billion per month in mortgage securities, so we’re on a path for a balance sheet of nearly $4 trillion.This expansion in the balance sheet is not going to help the economy. The vast majority of the expansion will simply add to excess reserves in the banking system that’s already overstuffed with $1.4 trillion in excess reserves. Banks, knowing the Fed will eventually retract this liquidity are not eager to lend it out.The Fed may claim that by driving down long-term rates, it can generate some improvement in the housing market. But notice how home building is recovering much faster than home buying. This recovery in housing would have happened anyway. Another issue at the Fed’s meeting will be how to handle the drop in unemployment. In September, the Fed said the jobless rate would finish the year at about 8.1% and not get to 6.5% until mid-2015.But the unemployment rate is more likely to finish the year at 7.7% and hit 6.5% sometime in 2014. So, is the Fed willing to move up its potential first rate hike? Not likely. The Fed is committed to a course of super-ease and will stay that way. The result will be more inflation and some real difficultly when the Fed finally decides to do something about it.

As early as Tuesday Senate Majority Leader Harry Reid (D., Nev.) will seek to extend a 2008 emergency program that aids banks and their wealthiest customers. Senator Richard Shelby (R., Ala.) tells us that he will be voting no, and taxpayers should hope that a bipartisan majority will join him.

Mr. Shelby rightly says that the program, known as the Transaction Account Guarantee (TAG), represents far too much taxpayer exposure. U.S. banks now hold close to $1.5 trillion in TAG deposits. These are non-interest-bearing accounts, typically owned by businesses, well-heeled individuals and local governments. Whereas regular coverage from the Federal Deposit Insurance Corporation now guarantees up to $250,000, TAG accounts enjoy unlimited protection from the FDIC.

We've never understood why middle-class taxpayers should be forced to stand behind an infinite guarantee for the largest bank customers. Instead of providing an answer, the bank lobby tries to pretend that those taxpayers really don't stand behind it and that it's fully funded by premiums paid by banks. Taxpayers can see for themselves by checking the FDIC website, which proudly notes that "the resources of the United States government stand behind FDIC-insured depositors."

Community bankers in particular say they need TAG to compete with the big banks that benefit from too-big-to-fail, but one bad taxpayer guarantee does not warrant another. The policy goal should be to shrink the taxpayer safety net whenever possible.

Bankers keep saying that they have cleaned up their balance sheets, raised capital, improved underwriting and enhanced their liquidity since the crisis days of 2008. So why do they still need a crisis-era backstop courtesy of Uncle Sugar? And can they really argue for regulatory relief during the same lobbying visit when they ask for an extended federal guarantee?

The House leadership has wisely expressed its opposition to TAG. Now it's up to the Senate to signal an end to the era of bank bailouts. A Tuesday cloture vote could give lawmakers the perfect opportunity to demonstrate a turn toward taxpayer protection and more market discipline. Senators should join with Mr. Shelby and tag this bill out on the floor.

I get that, but OTOH hand FOX is number one for a reason. Also, there is the fact that the Pravdas are sluts and a good knock-down brawl is good for ratings. If the Reps don't put up a fight, then , , , they will lose.

The Federal Reserve made two big changes today, but changes that were mostly anticipated by the markets.

First, the Fed decided to convert Operation Twist into an outright expansion of its balance sheet. Since September 2011, the Fed has been buying $45 billion per month in long-term Treasury securities and, at the same time, selling $45 billion in short-term securities. Once this program ends at the end of December, the Fed will keep buying the long-term securities but stop selling the short-term ones.

This is not some cosmetic change. Unlike Operation Twist, which shifted the composition of the Fed’s balance sheet (more long-term, less short-term), the new program will expand the size of the balance sheet. If the Fed does it for all of 2013, it will add about $540 billion to a balance sheet that is now $2.8 trillion. Meanwhile, the Fed will keep buying $40 billion per month in mortgage securities, so we’re on a path for a balance sheet of nearly $4 trillion by the end of next year.

We don’t like the change. The extra expansion of the Fed’s balance sheet is not going to help the economy. The vast majority will simply add to excess reserves in a banking system that’s already overstuffed with $1.4 trillion in excess reserves. Banks, knowing the Fed will eventually retract this liquidity are not eager to lend it out. When nominal GDP – real GDP plus inflation – is consistently growing at a 4%+ annual rate, a federal funds rate of nearly zero is unsustainably low. Monetary policy is already too loose. Policymakers need to focus on fiscal and regulatory obstacles to growth, not a supposed lack of monetary accommodation.

The second big change by the Fed is the removal of a specific timeframe for keeping rates at essentially zero. As recently as the October meeting, the Fed was saying it would keep rates at current levels through mid-2015. Instead, the Fed introduced economic guideposts to signal when it will start changing short term rates. These include an unemployment rate at or below 6.5%, an inflation forecast (by the Fed) of 2.5% or more, or an unmooring of inflation expectations. In addition, the Fed says it will also look at other measures of the labor market, inflation pressure, and the financial markets. Note that the Fed’s most important inflation measure is its own projection of future inflation, not actual inflation. In other words, higher inflation, by itself, won’t mean higher short term rates, unless the Fed thinks higher inflation will be persistent.

Notably, the Fed also issued a more pessimistic set of economic projections than it previously released in September, reducing the real GDP growth rate for 2012-15 by about 0.1 percentage points per year. Despite the fact that the unemployment rate in recent months has declined faster than the Fed anticipated, it thinks the jobless rate will end 2014 at or slightly above where it previously thought. Taking these projections at face value, as well as the Fed’s projections for inflation, suggests the consensus view at the Fed is the federal funds rate will not have to rise until the third quarter of 2015. This is consistent with its previous guidance of staying where they are until at least mid-2015. By contrast, plugging the First Trust forecast of the unemployment rate into the Fed’s framework suggests the first rate hike will come in the third quarter of 2014, about a year earlier than the Fed now anticipates.

Other, more minor, changes to the statement include the following.(1) Adding an assessment of employment into the very first sentence of the statement, showing how focused the Fed is on the labor market. (2) Removing a reference to the housing market coming back “from a depressed level,” suggesting the Fed thinks the housing recession is getting further away in the rear view mirror and is less relevant to the economy today.(3) Inserting a reference to monetary policy staying accommodative for a considerable period “after the asset purchase program ends.” In other words, the Fed will stop expanding its balance sheet before it starts raising rates.It also reiterated that it will “closely monitor” the economy and financial markets to gauge whether it should continue asset purchases or even expand them.Once again, the lone dissent was from Richmond Fed President Jeffrey Lacker, who opposed both the asset purchase program and the economic guideposts chosen to signal when the Fed will consider raising interest rates.

Like we have been saying for many months, quantitative easing will simply keep adding to the already enormous excess reserves in the bank system, not deal with the underlying causes of economic weakness, including the growth in government spending, excessive regulation, and expectations of higher future tax rates. It will not add anything to economic growth and, as long as banks are reluctant to lend aggressively, not cause hyper-inflation either.

Wesbury: "Like we have been saying for many months, quantitative easing will simply keep adding to the already enormous excess reserves in the bank system, not deal with the underlying causes of economic weakness, including the growth in government spending, excessive regulation, and expectations of higher future tax rates."

Where do they come up with this stuff? Wesbury would have been a far better Fed Chair than Bernancke.

Wesbury here, just reporting on the Fed: "Other...changes...include... (2) Removing a reference to the housing market coming back “from a depressed level,” suggesting the Fed thinks the housing recession is getting further away in the rear view mirror and is less relevant to the economy today."

Crisis IS the new normal in housing, and it will take another turn for the worse AFTER the Fed begins to return interest rates to market levels.---------------------

"the Fed has bought more than 70% of new Treasury debt issuance this year"

Bought Treasury?? Bought with WHAT?? Oil? Gold? They are the printer of money. We are borrowing only 30% of the fiscal shortfall of over a trillion a year and printing the rest. What could possibly go wrong? (Almost everything you can imagine.) Forget about China, what if the Fed calls these notes due!

"Sooner or later the bill for open-ended monetary stimulus will arrive..." - Ya think? Not if your only source of information is the Washington Post!

The Fed's ContradictionEasier money hasn't led to more growth, so we need still easier money.

Four years ago this month the Federal Reserve began its epic program of monetary easing to rescue an economy in recession. On Wednesday, Chairman Ben Bernanke declared that this has worked so well that the Fed must keep easing money for as long as anyone can predict in order to save a still-sputtering recovery.

That's the contradiction at the heart of the Fed's latest foray into "unconventional policy," which is a euphemism for finding new ways to print money: The economy needs more monetary stimulus because it is still too weak despite four years of previous and historic amounts of monetary stimulus. In the words of the immortal "Saturday Night Live" skit: We need "more cowbell."

In his press conference Wednesday, Mr. Bernanke was at pains to say this week's decisions were nothing new, merely an implementation of the policy direction that the Fed's Open Market Committee had set in September. This is technically true, but the timing and extent of the implementation are more than details.

The Fed committed Wednesday to purchase an additional $45 billion in long-term Treasury securities each month well into 2013, in addition to the $40 billion in mortgage assets it is already buying each month. At $85 billion a month, the Fed's balance sheet will thus keep growing from its current $2.9 trillion, heading toward $4 trillion by the end of the year. Four years ago it was less than $1 trillion.

The Fed's goal is to push down long-term interest rates even lower than they are, to the extent that's possible when the 10-year Treasury note is trading at 1.7%. The theory goes that this will in turn reduce already very low mortgage rates, which will help spur a housing recovery, which will lead the economy out of its despond. This has also been the theory for the last four years.

In case there was any doubt about its resolve, the Fed statement also issued a new implicit annual inflation target: 2.5%. The official target is still 2%. But the Open Market Committee stated that it will keep interest rates near zero, and by implication keep buying bonds, as long as the jobless rate stays above 6.5% and inflation stays "no more than a half-percentage point above the Committee's 2-percent longer-run goal."

That is a 2.5% inflation target by any other name, and it's striking to see a central bank in the post-Paul Volcker era say overtly that it wants more inflation. This is a victory for the Fed's dovish William Dudley-Janet Yellen faction that echoes economists who think we have to inflate our way out of the debt crisis. Inflation remains quiescent, but central banks that ask for more inflation invariably get it.

These new overt economic targets are part of Mr. Bernanke's campaign for more "transparency" in monetary policy, but they also have the effect of exposing how much the Fed has misjudged the economy. In January 2012, the Board of Governors and regional bank presidents predicted growth this year in the range of 2.2%-2.7%. On Wednesday, they predicted growth of 1.7%-1.8%, which means they are expecting a downbeat fourth quarter.

Which brings up another irony: Mr. Bernanke may be pulling the trigger on more bond purchases now because he fears economic damage from consumer and business concern over the fiscal cliff. Yet no one has done more to promote public and market worry over the fiscal cliff than Mr. Bernanke, notably in his June testimony to Congress.

Meantime, the Fed's near-zero interest rate policy will continue to disguise the real cost of government borrowing. One reason the Obama Administration can keep running trillion-dollar deficits is because it can borrow the money at bargain rates. Stanford economist and Journal contributor John Taylor says the Fed has bought more than 70% of new Treasury debt issuance this year.

All of this will create a fiscal cliff of its own when interest rates start to rise. The Congressional Budget Office says that every 100 basis-point increase in interest rates adds about $100 billion a year to government borrowing costs. Pity the President and Congress who have to refinance $15 trillion in debt at 6%. If Mr. Bernanke really wants to drive the President and Congress to reduce future spending, he shouldn't keep bailing them out with easier money.

The overarching illusion is that ever-easier monetary policy can return the U.S. economy to a durable expansion and broad-based prosperity. The bill for unbridled government spending stimulus is already coming due. Sooner or later the bill for open-ended monetary stimulus will arrive too.----------------------

I can't remember, was it under Bush or Reagan where our credit rating got downgraded? What will that cost when we need to re-finance $24 trillion at market interest rates?

The Consumer Price Index (CPI) declined 0.3% in November, coming in slightly below the consensus expected -0.2%. The CPI is up 1.8% versus a year ago.“Cash” inflation (which excludes the government’s estimate of what homeowners would charge themselves for rent) fell 0.5% in November but is up 1.7% in the past year.

All of the decline in the CPI in November can be attributed to energy prices, which fell 4.1%. Food prices rose 0.2%. The “core” CPI, which excludes food and energy, was up 0.1% in November and is up 1.9% versus a year ago. The consensus expected gain of 0.2% in November.

Real average hourly earnings – the cash earnings of all employees, adjusted for inflation – were up 0.5% in November but are unchanged in the past year. Real weekly earnings are down 0.1% in the past year.

Implications: For now, Ben Bernanke is smiling because all is quiet on the inflation front. Consumer prices fell 0.3% in November, falling short of consensus expectations and are up only 1.8% from a year ago. “Core” prices, which exclude food and energy, were up only 0.1% in November, also coming in lower than consensus expectations, and are up 1.9% from a year ago. Neither figure sets off alarm bells. Instead, they suggest the Federal Reserve’s preferred measure of inflation, the PCE deflator (which usually runs a Ľ point below the CPI) remains below the Fed’s target of 2%. We don’t expect this to last. With nominal GDP growth – real GDP growth plus inflation – running at 4%+, a federal funds rate at essentially zero will generate higher rates of inflation in the year ahead. Look for housing, which makes up about 30% of the CPI, to be a large contributor to higher inflation in the next few years. It’s important to recognize that the Fed will not start raising rates just because inflation gets above its target of 2%. For the Fed, the key measure of inflation is its own forecast of future inflation. So even if inflation goes to roughly 3% next year, as long as the Fed projects the rise to be temporary it will not react by raising short-term interest rates. The Fed is more focused on the labor market and, we believe, is willing to let inflation exceed its long-term target of 2% for a prolonged period of time. The best news in today’s report was that real average hourly earnings rose 0.5% in November, the largest rise since December 2008. This, as well as job growth and low financial obligations by households, will help support growth in consumer spending in the year ahead.

Leszek Balcerowicz: The Anti-Bernanke Leszek Balcerowicz, the man who saved Poland's economy, on America's mistakes and the better way to heal from a financial crisis..By MATTHEW KAMINSKI Warsaw

As an economic crisis manager, Leszek Balcerowicz has few peers. When communism fell in Europe, he pioneered "shock therapy" to slay hyperinflation and build a free market. In the late 1990s, he jammed a debt ceiling into his country's constitution, handcuffing future free spenders. When he was central-bank governor from 2001 to 2007, his hard-money policies avoided a credit boom and likely bust.

Poland was the only country in the European Union to avoid recession in 2009 and has been the fastest-growing EU economy since. Mr. Balcerowicz dwells little on this achievement. He sounds too busy in "battle"—his word—against bad policy.

"Most problems are the result of bad politics," he says. "In a democracy, you have lots of pressure groups to expand the state for reasons of money, ideology, etc. Even if they are angels in the government, which is not the case, if there is not a counterbalance in the form of proponents of limited government, then there will be a shift toward more statism and ultimately into stagnation and crisis."

Looking around the world, there is no shortage of questionable policies. A series of bailouts for Greece and others has saved the euro, but who knows for how long. EU leaders closed their summit in Brussels on Friday by deferring hard decisions on entrenching fiscal discipline and pro-growth policies. Across the Atlantic, Washington looks no closer to a "fiscal cliff" deal. And the Federal Reserve on Wednesday made a fourth foray into "quantitative easing" to keep real interest rates low by buying bonds and printing money.

As a former central banker, Mr. Balcerowicz struggles to find the appropriate word for Fed Chairman Ben Bernanke's latest invention: "Unprecedented," "a complete anathema," "more uncharted waters." He says such "unconventional" measures trap economies in an unvirtuous cycle. Bankers expect lower interest rates to spur growth. When that fails, as in Japan, they have no choice but to stick with easing.

"While the benefits of non-conventional [monetary] policies are short lived, the costs grow with time," he says. "The longer you practice these sorts of policies, the more difficult it is to exit it. Japan is trapped." Anemic Japan is the prime example, but now the U.S., Britain and potentially the European Central Bank are on the same road.

If he were in Mr. Bernanke's shoes, Mr. Balcerowicz says he'd rethink the link between easy money and economic growth. Over time, he says, lower interest rates and money printing presses harm the economy—though not necessarily or primarily through higher inflation.

First, Bernanke-style policies "weaken incentives for politicians to pursue structural reforms, including fiscal reforms," he says. "They can maintain large deficits at low current rates." It indulges the preference of many Western politicians for stimulus spending. It means they don't have to grapple as seriously with difficult choices, say, on Medicare.

Another unappreciated consequence of easy money, according to Mr. Balcerowicz, is the easing of pressure on the private economy to restructure. With low interest rates, large companies "can just refinance their loans," he says. Banks are happy to go along. Adjustments are delayed, markets distorted.

By his reading, the increasingly politicized Fed has in turn warped America's political discourse. The Lehman collapse did help clean up the financial sector, but not the government. Mr. Balcerowicz marvels that federal spending is still much higher than before the crisis, which isn't the case in Europe. "The greatest neglect in the U.S. is fiscal," he says. The dollar lets the U.S. "get a lot of cheap financing to finance bad policies," which is "dangerous to the world and perhaps dangerous to the U.S."

The Fed model is spreading. Earlier this fall, the European Central Bank announced an equally unprecedented plan to buy the bonds of distressed euro-zone countries. The bank, in essence, said it was willing to print any amount of euros to save the single currency.

Mr. Balcerowicz sides with the head of Germany's Bundesbank, the sole dissenter on the ECB board to the bond-buying scheme. He says it violates EU treaties. "And second, when the Fed is printing money, it is not buying bonds of distressed states like California—it's more general, it's spreading it," he says. "The ECB is engaging in regional policy. I don't think you can justify this."

"So they know better," says Mr. Balcerowicz, about the latest fads in central banking. "Risk premiums are too high—according to them! They are above the judgments of the markets. I remember this from socialism: 'We know better!'"

Mr. Balcerowicz, who is 65, was raised in a state-planned Poland. He got a doctorate in economics, worked briefly at the Communist Party's Institute of Marxism-Leninism, and advised the Solidarity trade union before the imposition of martial law in 1981. He came to prominence in 1989 as the father of the "Balcerowicz Plan." Overnight, prices were freed, subsidies were slashed and the zloty currency was made convertible. It was harsh medicine, but the Polish economy recovered faster than more gradual reformers in the old Soviet bloc.

These EU countries went through a credit boom-bust after 2009. Their economies tanked, Latvia's alone by nearly 20% that year. Denied EU bailouts, these governments were forced to adopt harsher measures than Greece. Public spending was slashed, including for government salaries. The adjustment hurt but recovery came by 2010. The BELL GDP growth curves are V-shaped. The PIGS decline was less steep, but prolonged and worse over time.

The systemic changes in the BELLs took a while to work, yet Mr. Balcerowicz says the radical approach has another, short-run benefit. He calls it the "confidence effect." When markets saw governments implement the reforms, their borrowing costs dropped fast, while the yields for the PIGS kept rising.

Greece focused on raising taxes, putting off expenditure cuts. They got it backward, says Mr. Balcerowicz. "If you reduce through reform current spending, which is too excessive, you are far more likely to be successful with fiscal consolidation than if you increase taxes, which are already too high."

He adds: "Somehow the impression for many people is that increasing taxes is correct and reducing spending is incorrect. It is ideologically loaded." This applies in Greece, most of Europe and the current debate in the U.S.

During his various stints in government in Poland, the name Balcerowicz was often a curse word. In the 1990s, he was twice deputy prime minister and led the Freedom Union party. As a pol, his cool and abrasive style won him little love and cost him votes, even as his policies worked. At the central bank, he took lots of political heat for his tight monetary policy and wasn't asked to stay on after his term ended in 2007.

Mr. Balcerowicz admits he was an easy scapegoat. "People tend to personalize reforms. I don't mind. I take responsibility for the reforms I launched." He says he "understands politicians when they give in [on reform], but I do not accept it." It's up to the proponents of the free market to fight for their ideas and make politicians aware of the electoral cost of not reforming.

On bailouts, Mr. Balcerowicz strikes an agnostic note. They can mitigate a crisis—as long as they don't reduce the pressure to reform. The BELL vs. PIGS comparison suggests the bailouts have slowed reform, but he notes recent movement in southern Europe to deregulate labor markets, privatize and cut spending—in other words, serious steps to spur growth.

"Once the euro has been created," Mr. Balcerowicz says, "it's worth keeping it." The single currency is no different than the gold standard, "which worked pretty well," he says. In both cases, member countries have to keep their budget deficits in check and labor markets flexible to stay competitive. Which makes him cautiously optimistic on the euro.

"It's important to remember that six, eight, 10 years ago Germany was like Italy, and it reformed," he says. Before Berlin pushed through an overhaul of the welfare state, Germany was called the "sick man of Europe." "There are no European solutions for the Italians' problem. But there are Italian solutions. Not bailouts, but better policies."

Why do some countries change for the better in a crisis and others don't? Mr. Balcerowicz puts the "popular interpretation of the root causes" of the crisis high on the list.

"There is a lot of intellectual confusion," he says. "For example, the financial crisis has happened in the financial sector. Therefore the reason for the crisis must be something in the financial sector. Sounds logical, but it's not. It's like saying the reason you sneeze through your nose is your nose."

The markets didn't "fail" but were distorted by bad policies. He mentions "too big to fail," the Fed's easy money, Fannie Mae FNMA 0.00%and the housing boom. Those are the hard explanations. "Many people like cheap moralizing," he says. "What a pleasant feeling to condemn greed. It's popular."

"Generally in the West, intellectuals like to blame the markets," he says. "There is a widespread belief that crises occur in capitalism mostly. The word crisis is associated with the word capitalism. While if you look in a comparative way, you see that the largest economic and also human catastrophes happen in non-market systems, when there's a heavy concentration of political power—Stalin, Mao, the Khmer Rouge, many other cases."

Going back to the 19th century, industrializing economies recovered best after a crisis with no or limited intervention. Yet Keynesians continue to insist that only the state can compensate for the flaws of the market, he says.

"This idea that markets tend to fall into self-perpetuating crises and only wise government can extract the country out of this crisis implicitly assumes that you have two kinds of people. Normal people who are operating in the markets, and better people who work for the state. They deny human nature."

Gathering the essays for his new collection, "Discovering Freedom," Mr. Balcerowicz realized that "you don't need to read modern economists" to understand what's happening today. Hume, Smith, Hayek and Tocqueville are all there. He loves Madison's "angels" quote: "If men were angels, no government would be necessary. If angels were to govern men, neither external nor internal controls on government would be necessary."

This Polish academic sounds like he might not feel out of place at a U.S. tea party rally. He takes to the idea.

"Their essence is very good. Liberal media try to demonize them, but their instincts are good. Limited government. This is classic. This is James Madison. This is ultra-American! Absolutely."

Hey, let’s avoid the debt-ceiling standoff by minting a trillion-dollar platinum coin insteadposted at 4:23 pm on January 4, 2013 by Allahpundit

Words cannot express my excitement that this banana-republic idea is now being taken seriously enough to attract vocal support from a sitting Democratic congressman. If you’re looking for a way to convince the public that the left has no interest whatsoever in reducing spending before we face a fiscal meltdown, you can’t do better than having Obama and Geithner respond to the GOP’s demand for cuts by producing a de facto handful of magic beans.

In fact, that’s my condition for supporting this proposal. I’ll back it to the hilt, but only if the masterminds behind it figure out a constitutional way to let Treasury choose beans as the trillion-dollar currency instead of a coin. That’ll show those Republicans.

“There is specific statutory authority that says that the Federal Reserve can mint any non-gold or -silver coin in any denomination, so all you do is you tell the Federal Reserve to make a platinum coin for one trillion dollars, and then you deposit it in the Treasury account, and you pay your bills,” Nadler said in a telephone interview this afternoon.

I asked whether he was serious.

“I’m being absolutely serious,” he said. “It sounds silly but it’s absolutely legal. And it would normally not be proper to consider such a thing, except when you’re faced with blackmail to destroy the country’s economy, you have to consider things.”By “things,” he means magic coins, not Medicare reform. Over at National Journal, a jittery Matthew Cooper wonders if the optics of all this might not be counterproductive for Democrats:

As bad as the House behavior has been, using a small legal provision meant to please numismatists to leverage the nation’s debts seems, um, risky. The only analogy I can think of is the Court-packing mess of the 1930s when President Roosevelt, faced with a cranky Supreme Court that overturned his social-welfare programs and those in the states, tried to enlarge the size of the Court to fill it with more sympathetic appointees. After an outcry, the president backed down. But FDR at least tried to make the change by proposing a statute and forcing a Senate debate. (The bill never cleared the chamber.)

Minting the coins would seem even more imperious. After all, the Supreme Court in the 1930s was knocking down state minimum-wage laws and other expressions of the popular will. FDR had some momentum behind him. But President Obama would look despotic if he embraced this tactic. (Imagine all the pictures of King Obama on a coin.)I assume the reason they’re thinking about a coin worth “only” a trillion instead of $10 trillion is because, you see, a $10 trillion coin would be exorbitant and sound crazy.

Via Mediaite, here’s Rick Santelli proving his extremism by wondering why people who refuse to mindlessly extend the nation’s line of credit while we’re on an unsustainable fiscal track are the “lunatics” in this debate. Exit question: Am I giving American voters way, way too much credit in thinking they’d laugh at the trillion-dollar coin idea? At this point, given the results in November, what’s the best result poll-wise we could hope for? 55-45 against?

When Priced in Gold, the US economy is at Depression-Era Levelsby Simon Black on December 31, 2012

December 31, 2012Buenos Aires, Argentina

As we slide into the end of yet another year in which the nominal price of gold has posted a positive return, I thought it would be interesting to take a look back on history to get a better understanding of where we are today.

It’s obvious that, for many reasons, the size of the global economy is far greater than it was decades ago. We learn in any basic economics course that, over the long run, enhanced productivity and increased technology drive long-term production gains.

Certainly, an economy can produce more widgets if you’re a lean, mean, automated machine… as opposed to a blacksmith with a hammer and forge.

But there are other factors as well. Population growth. Accounting standards. And of course, the continued inflation of the currency. $1 today buys a whole lot less today than it did a century ago, so when comparing, it’s important to find a better standard of measurement.

There are a number of pricing yardsticks we could use… like the cost of a New York City cinema ticket (25 cents in 1935, $20 today). But it would be awkard to calculate GDP in terms of billions of cinema tickets.

Gold is a much more appropriate (though still imperfect) long-term standard of pricing, with its history as a store of value dating back to the ancients.

With this in mind, I collected the appropriate data on gold prices, population, and GDP in the United States since 1791 and plotted GDP per capita denominated in ounces of gold.

This measurement smooths out changes in economic growth due to currency inflation and changes in the population, making it much easier to compares apples to apples.

The results are rather startling. In its earliest days, US GDP per capita was a mere 2.6 ounces of gold per person per year. But this grew quickly, effectively doubling in the 20 year period from 1791 to 1811.

Most of the 19th century proved difficult for growth, as it took another seven decades (over three times as long) for GDP per capita to double again. This makes sense given that the 19th century was marked by several costly wars (War of 1812, Mexican War, Civil War, etc.)

An industrialized American economy began to take off in the 20th century; GDP doubled from 12.00 ounces of gold per capita in 1892 to 23.55 ounces of gold per capita in 1916. And by 1929, it had almost doubled again to 41.12 ounces of gold per capita.

We know what happened after that– years of depression and economic stagnation. The economy bottomed in 1934 at 14.93 ounces of gold per capita, and then it began a multi-decade rise, peaking at 139.05 ounces of gold per capita in… 1970. This was right before Nixon closed the gold window. And the economy never touched that level again. How interesting.

Since 1970, it’s been a series of peaks and troughs. The economy boomed during the 1990s, then ran out of steam quickly in the ensuring dot-com/housing/sovereign bust.

We have just ended the year at 28.40 ounces of gold per capita (based on trailing twelve month GDP data). This is an astoundingly low figure.

To put it in perspective, since the end of the Great Depression, US GDP per capita has only been under 30 ounces of gold two times– this year, and 1980. That’s it.

In fact, the post-war average for the US economy is 72.83 ounces of gold per capita, so the economy today is an amazing 61% off this historical average.

Right now, the largest economy in the world is producing as much as it did in 1931, almost at the peak of the Great Depression. And no matter what the talking heads and politicians say, the data show that the trend is getting worse. Today’s figure is worse than last year, which was worse the year before. This trend of economic contraction goes back to 2001.

Curiously, this time period also coincides with the greatest expansion of debt and the monetary base in history. Hmmm. Coincidence?

This is truly incredible. With all of our modern advances in technology and productivity, our criminal Ponzi scheme debt-based fiat monetary system is so destructive that it’s turned the clock back seven decades on the economy. Mind blowing. If this doesn’t scream “SYSTEM RESET”, I don’t know what will.

Please share this with your friends and loved ones. It’s time for a wakeup call.

Jobs and Money Markets care more about the Fed than the labor market..

Once upon a time, the U.S. monthly jobs report would move markets as an indicator of the health of the private economy. These days, the employment news moves markets mainly based on how quickly it might cause the Federal Reserve to change its ultraloose monetary policy. These days in markets, money trumps jobs.

That's one lesson from this week's post-fiscal cliff economic news. On Thursday, the Fed released the minutes of its December Open Market Committee meeting, which disclosed that there was more dissent over the Fed's open-ended bond buying than previously believed.

The FOMC's December announcement had suggested that it was ready to buy $85 billion in Treasury and mortgage securities each month through the end of 2013. But this week's minutes said that "several" committee members "thought that it would probably be appropriate to slow or to stop purchases well before the end of 2013" due to concerns about financial stability and the Fed's rapidly growing balance sheet. Previously only Jeffrey Lacker, president of the Richmond Fed, had been known to be a dissenter from the bond-buying party.

This isn't what some investors wanted to hear. Stock and commodity prices around the world promptly fell on the news about the Fed minutes, underscoring the degree to which asset prices are floating on expectations of continued Fed easing.

But never worry. On Friday came another mediocre jobs report—and stocks and the rest of the riskier-asset plays rebounded despite this sign of still not-so-great economic growth. Why? Because investors believe that the weaker the jobs report, the more likely the Fed will keep buying bonds as far as the eye can see. So weakness equals strength, at least in stocks. So goes a financial world dominated by the decisions of central bankers.

Meanwhile, back in the real economy, slow growth continues to define the job market. The economy created 155,000 net new jobs, essentially the same as the 153,000 average monthly pace for all of 2012, which was the same as the average monthly gain in 2011. The jobless rate stayed at 7.8%, after the November rate had been adjusted up a tic from 7.7% due to the Labor Department's annual revisions.

For the year the economy created about 1.84 million new jobs, which is consistent with the plodding expansion and is barely keeping up with new entrants into the job market. In previous and healthier expansions, the economy created 2.5 million or more net new jobs a year.

The overall labor participation rate actually fell during 2012—to 63.6% of the civilian population from 64% in December 2011. The rate is now down to where it last was in 1981. That suggests more Americans have given up looking for work, gone on disability or retired prematurely because they couldn't find work.

The December jobs survey is the last one before the tax and spending increases of the fiscal-cliff deal kick in. That legislation contains a two-percentage-point increase in the payroll tax rate, which means a higher cost for working. The bill also includes another one-year extension in jobless benefits of up to 99 weeks, which is an incentive not to work. Neither policy will help job creation in 2013.

The Keynesians who run the U.S. economy these days are predicting better days ahead now that the worst of the fiscal cliff has been dodged and the housing market is coming back. We'll see if they're right, but meanwhile markets are likely to keep their eyes mainly on the masters of the economic universe at the Fed.

"Ironically, the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects."

"While borrowers like near-zero interest rates, there is little incentive for lenders to extend credit at that rate."

"[these] policies perversely decrease aggregate demand and increase unemployment while they repress the classic signaling and incentive effects of the price system"-------------------My new favorite economist John Taylor of Stanford says that Fed Policy is a Drag on the Economy. My hope is that President Rubio will put Taylor in charge of the Fed if we still have a nation worth saving at that point.

...Early in 2010 [the Fed] predicted that growth in 2012 would be a robust 4%. It turned out to be a disappointing 2%. And as the recovery fell short of their expectations, they continued and then doubled down on the emergency interventions used in the panic in 2008.

The Fed ratcheted up purchases of mortgage-backed and U.S. Treasury securities, and now they say more large-scale purchases are coming. They kept extending the near-zero federal funds rate and now say that rate will remain in place for at least several more years. And yet—unlike its actions taken during the panic—the Fed's policies have been accompanied by disappointing outcomes. While the Fed points to external causes, it ignores the possibility that its own policy has been a factor.

At the very least, the policy creates a great deal of uncertainty. People recognize that the Fed will eventually have to reverse course. When the economy begins to heat up, the Fed will have to sell the assets it has been purchasing to prevent inflation.

If its asset sales are too slow, the bank reserves used to finance the original asset purchases pour out of the banks and into the economy. But if the asset sales are too fast or abrupt, they will drive bond prices down and interest rates up too much, causing a recession. Those who say that there is no problem with the Fed's interest rate and asset purchases because inflation has not increased so far ignore such downsides.

The Fed's current zero interest-rate policy also creates incentives for otherwise risk-averse investors—retirees, pension funds—to take on questionable investments as they search for higher yields in an attempt to bolster their minuscule interest income. The low rates also make it possible for banks to roll over rather than write off bad loans, locking up unproductive assets. And extraordinarily low rates support and feed the spending appetites of Congress and the president, increasing deficits and debt.

More broadly, the Fed's excursion into fiscal policy and credit allocation raises questions about its institutional independence and accountability. This reduces public confidence in the central bank.

The large on-again off-again asset purchases have already created highly variable money growth—from 10% in January 2009 to 2% in June 2010 and back to 10% in early 2012 and then down again. Wide swings in money supply reduce macroeconomic stability—a danger that Milton Friedman warned about long ago.

There is yet another downside. Foreign central banks—whether they like it or not—tend to follow other central banks' easy-money policies to prevent their currency from appreciating sharply, which would put their exporters at a disadvantage. The recent effort of the new Japanese government to force quantitative easing on the Bank of Japan and thus resist dollar depreciation against the yen vividly makes this point. This global increase in money risks commodity booms and busts as we saw in 2011 and 2012.

When dissenters in and outside the Fed point out these costs, a majority of the Federal Open Market Committee—the main policy-making branch of the central bank—respond that the costs are outweighed by a huge benefit. They argue that the ultralow interest rates and asset purchases reduce unemployment by increasing aggregate demand, and they back up the argument with macroeconomic models.

But these models, which are useful for evaluating conventional monetary policy such as rules for the interest rate, were not designed and are not useful for evaluating the Fed's unconventional policies of the past few years. Instead, a basic microeconomic analysis shows that the policies perversely decrease aggregate demand and increase unemployment while they repress the classic signaling and incentive effects of the price system.

Consider the "forward guidance" policy of saying that the short-term rate will be near zero for several years into the future. The purpose of this guidance is to keep longer-term interest rates down and thus encourage more borrowing. A lower future short-term interest rate reduces long-term rates today because portfolio managers can, in a form of arbitrage, easily adjust their portfolio mix between long-term bonds and a sequence of short-term bonds.

So if investors are told by the Fed that the short-term rate is going to be close to zero in the future, then they will bid down the yield on the long-term bond. The forward guidance keeps the long-term rate low and tends to prevent it from rising. Effectively the Fed is imposing an interest-rate ceiling on the longer-term market by saying it will keep the short rate unusually low.

The perverse effect comes when this ceiling is below what would be the equilibrium between borrowers and lenders who normally participate in that market. While borrowers might like a near-zero rate, there is little incentive for lenders to extend credit at that rate.

This is much like the effect of a price ceiling in a rental market where landlords reduce the supply of rental housing. Here lenders supply less credit at the lower rate. The decline in credit availability reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence of the policy.

Research presented at the annual meeting of the American Economic Association this month by Eric Swanson and John Williams of the San Francisco Fed is consistent with this view of credit markets. It shows that during periods of forward guidance, the long-term interest rate does not adjust to events that shift supply or demand as it does in normal periods. In addition, while credit to corporate businesses is up 12% over the past two years, credit has declined to noncorporate businesses where the low rate is more likely to be a disincentive for lenders. Peter Fisher, head of fixed income at the global investment-management firm BlackRock and a former Fed and Treasury official, wrote in September: "[A]s they approach zero, lower rates . . . run the significant risk of perversely discouraging the lending and investment we need."

Ironically, the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects. No one should want a continuation of this vicious circle... more at wsj.com, link above

John Taylor: Fed Policy Is a Drag on the Economy While borrowers like near-zero interest rates, there is little incentive for lenders to extend credit at that rate..By JOHN B. TAYLOR

As they meet this week, Federal Reserve Chairman Ben Bernanke and his colleagues will be looking at an economic recovery that has been far weaker than expected. Early in 2010 they predicted that growth in 2012 would be a robust 4%. It turned out to be a disappointing 2%. And as the recovery fell short of their expectations, they continued and then doubled down on the emergency interventions used in the panic in 2008.

The Fed ratcheted up purchases of mortgage-backed and U.S. Treasury securities, and now they say more large-scale purchases are coming. They kept extending the near-zero federal funds rate and now say that rate will remain in place for at least several more years. And yet—unlike its actions taken during the panic—the Fed's policies have been accompanied by disappointing outcomes. While the Fed points to external causes, it ignores the possibility that its own policy has been a factor.

At the very least, the policy creates a great deal of uncertainty. People recognize that the Fed will eventually have to reverse course. When the economy begins to heat up, the Fed will have to sell the assets it has been purchasing to prevent inflation.

If its asset sales are too slow, the bank reserves used to finance the original asset purchases pour out of the banks and into the economy. But if the asset sales are too fast or abrupt, they will drive bond prices down and interest rates up too much, causing a recession. Those who say that there is no problem with the Fed's interest rate and asset purchases because inflation has not increased so far ignore such downsides.

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Federal Reserve Chairman Ben Bernanke.The Fed's current zero interest-rate policy also creates incentives for otherwise risk-averse investors—retirees, pension funds—to take on questionable investments as they search for higher yields in an attempt to bolster their minuscule interest income. The low rates also make it possible for banks to roll over rather than write off bad loans, locking up unproductive assets. And extraordinarily low rates support and feed the spending appetites of Congress and the president, increasing deficits and debt.

More broadly, the Fed's excursion into fiscal policy and credit allocation raises questions about its institutional independence and accountability. This reduces public confidence in the central bank.

The large on-again off-again asset purchases have already created highly variable money growth—from 10% in January 2009 to 2% in June 2010 and back to 10% in early 2012 and then down again. Wide swings in money supply reduce macroeconomic stability—a danger that Milton Friedman warned about long ago.

There is yet another downside. Foreign central banks—whether they like it or not—tend to follow other central banks' easy-money policies to prevent their currency from appreciating sharply, which would put their exporters at a disadvantage. The recent effort of the new Japanese government to force quantitative easing on the Bank of Japan and thus resist dollar depreciation against the yen vividly makes this point. This global increase in money risks commodity booms and busts as we saw in 2011 and 2012.

When dissenters in and outside the Fed point out these costs, a majority of the Federal Open Market Committee—the main policy-making branch of the central bank—respond that the costs are outweighed by a huge benefit. They argue that the ultralow interest rates and asset purchases reduce unemployment by increasing aggregate demand, and they back up the argument with macroeconomic models.

But these models, which are useful for evaluating conventional monetary policy such as rules for the interest rate, were not designed and are not useful for evaluating the Fed's unconventional policies of the past few years. Instead, a basic microeconomic analysis shows that the policies perversely decrease aggregate demand and increase unemployment while they repress the classic signaling and incentive effects of the price system.

Consider the "forward guidance" policy of saying that the short-term rate will be near zero for several years into the future. The purpose of this guidance is to keep longer-term interest rates down and thus encourage more borrowing. A lower future short-term interest rate reduces long-term rates today because portfolio managers can, in a form of arbitrage, easily adjust their portfolio mix between long-term bonds and a sequence of short-term bonds.

So if investors are told by the Fed that the short-term rate is going to be close to zero in the future, then they will bid down the yield on the long-term bond. The forward guidance keeps the long-term rate low and tends to prevent it from rising. Effectively the Fed is imposing an interest-rate ceiling on the longer-term market by saying it will keep the short rate unusually low.

The perverse effect comes when this ceiling is below what would be the equilibrium between borrowers and lenders who normally participate in that market. While borrowers might like a near-zero rate, there is little incentive for lenders to extend credit at that rate.

This is much like the effect of a price ceiling in a rental market where landlords reduce the supply of rental housing. Here lenders supply less credit at the lower rate. The decline in credit availability reduces aggregate demand, which tends to increase unemployment, a classic unintended consequence of the policy.

Research presented at the annual meeting of the American Economic Association this month by Eric Swanson and John Williams of the San Francisco Fed is consistent with this view of credit markets. It shows that during periods of forward guidance, the long-term interest rate does not adjust to events that shift supply or demand as it does in normal periods. In addition, while credit to corporate businesses is up 12% over the past two years, credit has declined to noncorporate businesses where the low rate is more likely to be a disincentive for lenders. Peter Fisher, head of fixed income at the global investment-management firm BlackRock and a former Fed and Treasury official, wrote in September: "[A]s they approach zero, lower rates . . . run the significant risk of perversely discouraging the lending and investment we need."

Ironically, the harmful effects of these interventions lead policy makers to expand them, which further increases their harmful effects. No one should want a continuation of this vicious circle.

If the economy surprises a bit on the upside this year, we can hope that it results in fewer interventions by the Fed—perhaps a halt to asset purchases. This will bolster growth and help put the economy on a sustained recovery path.

Mr. Taylor is a professor of economics at Stanford University and a senior fellow at the Hoover Institution, and a former Treasury undersecretary for international

In just under 30 minutes, Peter Schiff and Doug Casey muse on many facets of the crumbling edifice of the status quo that is our current world.

From Gold's relatively imminent rise to $5,000 and beyond, to investor ignorance of reality, Casey & Schiff swing from discussions of the US as political entity going forward to 'escape from America' plans for personal and wealth assets, and the realization that the biggest casualty (of US indebtedness), aside from individual liberty, is the value of the dollar - as taxing the middle class is unpopular with both parties - leaving only one route for the government - the inflation tax. Owning gold, silver, and foreign assets is preferred and while the rest of the world is also printing, the US is likely to beat them all.

People "are clueless with respect to the true state of the global economy," with regard to inflation, fiat currencies, and specifically what will happen to the dollar. The conversation is wide-ranging and absolutely must-see as they remind market-watchers that "the whole thing is artificial," as you can't just keep printing money and monetizing debt without the dollar imploding with monetary policy descending (along with its trillion dollar coin) into 'Three Stooges' comedy.

The conversation weaves to some endgame discussions which bring Peter to discuss his father, who he sees as a political prisoner, and his views on the future...

"the biggest change that is coming to the global economy is a realignment of global living standards."

Correcting my own imprecise writings, I think we need to consider dropping the term U.S. "Dollar", a meaningless designation if the date of value is not specified. Otherwise dollar would need to be written with a subscript of dollar date for inflation value calculations. Economists use terms like year specified constant dollars, but really, to which part of the year do they refer?